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Essentials of Distribution
Essentials
of
Distribution
by
Paul D. Converse
Professor of Business Organization and
Operation, I'n'wersity of Illinois; Au-
thor of Marketing Methods and
Policies, Selling Policies, The
Elements of Marketing, etc.
NEW YORK
PRENTICE-HALL, INC.
COPYRIGHT, 1936, BY
PRENTICE-HALL, INC.
ALL RIGHTS RESERVED. NO PART OF THIS BOOK MAY BB
REPRODUCED IN ANY FORM, BY MIMEOGRAPH OR ANY
OTHER MEANS, WITHOUT PERMISSION IN WRITING FROM
THE PUBLISHERS.
First Punting .... June 1936
Second Printing .... June 1937
Third Printing March 1946
Fourth Printing. .February 1947
PRINTED IN THE UNITED STATES OF AMERICA
To MY FORMER TEACHERS
C. J. H.
G. D. H.
AND THROUGH THEM TO THE TEACHERS OF AMERICA
Preface
1 I 'HIS volume attempts to condense and simplify the
JL principles of market distribution for the use of stu-
dents beginning the study of distribution and of persons
engaged in business who want a comprehensive view of
the field of distribution. It contains a discussion of dis-
tribution costs, distribution functions, distribution of
selected commodities, the operations of various types of
middlemen, and the principles of merchandising, sales-
manship, sales management, and advertising. The treat-
ment of so many subjects in a volume of this size
requires that each be discussed briefly. It is hoped, how-
ever, that the material presented will give the reader a
clear picture of the ground covered and perhaps stimu-
late him to further study in the field.
PAUL D. CONVERSE
Contents
PAQJB
PREFACE vii
CHAPTER
1. MEANING AND COST OF DISTRIBUTION 1
Interest in marketing; Distribution a part of business;
Market distribution a part of economics; Object of distri-
bution; Methods of studying distribution; Advantages of
functional approach; Advantages of commodity approach;
Advantages of middleman approach. Cost of Distribution
— Cost of production and distribution: Illustrations; Total
cost of marketing; Why are marketing costs so high?
Transportation as an element in marketing cost; Service
as an element in cost; Have marketing costs increased?
Marketing costs should be reduced.
2. WHAT MARKETING INVOLVES — MARKETING FUNC-
TIONS 15
Functions or services involved in distribution; The mar-
keting functions. Buying — Buying function analyzed:
Determining needs, Finding sources of supply, Negotiating
terms, Obtaining title. Selling—Selling function analyzed:
Creating demand, Finding buyers, Giving advice, Negoti-
ating terms. Transporting — Goods moved by owners and
agents; Methods of transportation; Our transportation
system; Cost of transportation; Services rendered by rail-
roads: Liability of common carriers, Bills of lading, De-
murrage, Reconsignment, In-transit privileges, Suggestions
for improved service; Services performed by motor trucks;
Services of passenger automobiles.
3. MARKETING FUNCTIONS (CONTINUED) .... 33
Storage — Storage creates time utility; Influence of storage
on prices; Storage supplies seasonal demands; Reserve
stocks ; Costs of storage ; Kinds of storage : Quick freezing ;
Improved methods of transportation and production lessen
need for storage; Where should goods be stored? Freight
rates; Who should store goods? Storage facilities; Public
warehouses: Services of public warehouses, Liability of
x Contents
CHAPTER PAGE
3. MARKETING FUNCTIONS (CONTINUED) (Cont.)
public warehouses, Charges of public warehouses;
Government-licensed warehouses. Packing. Standardizing
— Uniform standards; Wastes caused by lack of standards.
Grading. Assembling. Dividing. Financing. Risking —
Why risks are assumed; Shifting risk; Guarding against
risks; Risk increases marketing costs. Recording. Man-
agement. Concentration and dispersion.
4. MIDDLEMEN, TRADE CHANNELS, AND COMMODITIES 56
The middleman approach; Kinds of middlemen: Mer-
chants, Functional middlemen; Trade channels: Manu-
factured goods, Trade channels illustrated, Factors
determining the trade channel, Sale in same stage of dis-
tribution, Integration, Limitations on integration ; The
commodity approach : Basis of classification, A classifica-
tion of commodities, Farm products, Industrial goods, Con-
sumers' goods, Convenience goods, Shopping goods, Wagon
goods, Bulk goods; Organization of material.
5. BROKERS AND OTHER AGENTS 72
The agent; The broker; The sales agent; Buying; Resi-
dent buyers; Commission merchants; Manufacturers'
agents; Types of brokers; Volume of brokerage business;
Paid for their services; Functions performed by brokers;
Place of brokers in trade channel; Operation of brokers;
Earnings of brokers; Advantages of brokers' selling func-
tion: Service to small producers, Advice; Cost of brokers;
Disadvantages of brokers; Social value of brokers; Com-
mission merchants.
6. AUCTIONS, EXCHANGES, AND SPECULATION ... 86
Auctions — Two kinds of sales; Characteristics of public
sales; Functions of public sales; Importance of auctions;
Types of auctions; The fruit auctions: Position in trade
channel, Charges; Value of auction company's services.
Commodity Exchanges — Exchanges distinguished from
auctions; Products handled; Call and continuous markets;
Spots and futures; Future trading. Speculation — Marginal
dealing; Short selling; Evils of speculation; Hedging;
Hedging illustrated; Advantages of hedging,
7. WHOLESALERS 103
Wholesaler defined; Place in trade channel; Usefulness of
wholesalers; Volume of wholesale trade; Types of whole-
Contents xi
7. WHOLESALERS (Cont.)
sale middlemen listed by Census; Wholesale merchants;
Goods handled; Ownership; Territory; Method of opera-
tion; Functions performed; The service wholesaler; Stor-
ing; Buying; Dividing; Selling; Specialty salesmen;
Credit; Delivery; Cash-carry wholesalers; Truck whole-
salers; The drop shipper; The mail-order wholesaler;
Semi-jobber; Mutual wholesalers; Operating expenses;
Expense and size; Location; Private brands; Advantages
of private brands: Control, Quality, Price; Disadvantages
of private brands; Conclusion on private brands; Future
of the wholesaler.
8. RETAILING 127
Functions of retailers; Volume of retail business; Types of
retailers; Basis of operation; Location; Integrated and
non-integrated stores; Basis of study; Expenses; Reasons
for variations in expenses; Size of stores; Operation of
very small stores.
9. INDEPENDENT STORES 143
The independent store; Common problems of small stores;
Rural and city markets; Location; Rural stores; Advan-
tages of rural stores; Disadvantages of rural stores; Shop-
ping and convenience goods; Conclusions on rural stores;
Trading center stores; Down-town city stores; Degree of
specialization; Competitors; Advantages; Disadvantages;
Neighborhood and suburban stores; Automobile trade;
Vending machines; Self-service stores.
fO. DEPARTMENT STORES AND MAIL-ORDER HOUSES . . 163
Department Stores — Definition; Importance; Organiza-
tion; A woman's store; Service; Competitive advantages
of the department store: Buying power, Convenience of
a single store, Advertising, Location, Cut-priced leaders;
Competitive disadvantages of the department store; Prob-
lems of the department store: Management, Abuse of
service, Expense. Mail-Order Houses — Types of mail-order
sellers; Growth of selling by mail; Goods sold; Low prices;
Volume of mail-order business; Advantages of selling by
mail; Disadvantages of selling by mail; Decline in mail-
order business.
11. CHAIN STORES 183
Definition; Types; Importance; Organization; Expenses;
Advantages of chain stores: Cost of goods, Selling prices,
xii Contents
11. CHAIN STORES (Cont.)
Expenses, Limited service, Efficiency, Stock turnover, No
inherent advantage from efficiency, Advertising, Location,
Cut-price leaders; Limitations and disadvantages of
chains: Hostile public opinion; Conclusions on chains.
12. MEETING CHAIN COMPETITION 202
What the independent merchant can do to meet chain com-
petition; Individual action; Price leaders; Service; Col-
lective action; Advertising; Supervision; Research;
Buying; Types of organizations; The buying club;
Retailer-owned wholesale1 house; Disadvantages of the
retailer-owned wholesale house; Mutual wholesalers;
Wholesaler-retailer cooperative chains; Importance of
cooperative chains in the grocery trade; Prices; Coopera-
tive drug and hardware chains; Group buying; Selection
of goods; Lower prices; Other forms of collective action.
13. MARKETING INDUSTRIAL GOODS 221
Industrial goods; Kinds of industrial goods; Overlapping
with consumers' goods; Equipment; Obsolescence; The
buyers; Sales methods; Types of middlemen; Supplies;
Coal; Quality of coal; Marketing coal; Sales methods;
Wholesalers; Sales agents; Raw and partly finished goods;
Steel; Marketing methods; Steel jobbers; Fabricated
parts; Who controls the purchase of industrial goods?
Finding the buyer; Type of salesman needed.
14. SELLING SERVICE 239
Meaning of service; Kinds of services; Importance of serv-
ice; Selling services and selling goods; Advertising;
Publicity; Selling entertainment; Selling professional serv-
ices; Other personal services; Selling transportation; Sell-
ing electricity; Selling gas; Selling telephone and telegraph
service; Selling thrift; Selling lodgings.
15. MARKETING FARM PRODUCTS 253
The nature of farming; One-crop versus mixed farming;
Farm income; Concentration and dispersion; Farm prod-
ucts as raw materials; Farm products as consumption
goods; Marketing methods; Farm products sold for local
consumption; Shipment by truck; Rail shipment; The
supply of farm products; The demand for farm products;
Prices of farm products; Control of supply; Shifting pro-
duction; Forecasting prices; Production cycles; The co-
Contents xiii
15. MARKETING FARM PRODUCTS (Cont.)
operative marketing of farm products; Types of coopera-
tives; Objects of cooperatives; Reducing marketing cost;
Pooling; Increasing demand; Stabilizing prices; Monopoly
prices; Prices paid and received; Farm relief; Early forms
of relief ; Tariffs ; Farm Board ; Subsidy ; Debenture plan ;
Domestic allotment plan: Corn-hog contracts, Who pays
the tax? Benefits of the AAA; Do we need permanent
control of agricultural output?
16. MARKETING GRAIN AND LIVESTOCK 279
Grain — Chief grains; Grain belts; Wheat; Kinds of wheat;
Production of wheat in the United States; The country
marketing of wheat; Types of elevators; Operation of
elevators; Sale of gram by elevators; Terminal marketing
of grain; The price of wheat; Cost of marketing wheat;
Production of corn; Uses of corn; Price of corn; Coop-
erative marketing associations. Livestock — Production of
livestock; Consumption of meat; Livestock sections; Con-
centration of livestock; Older methods of marketing live-
stock; Newer methods of marketing livestock: Truck
shipments, Concentration yards, Direct marketing; Central
markets; Commission men; Buyers of livestock; Reship-
ment of stock; Yard traders; Cost of marketing; Prices;
Corn-hog ratio; Use of corn-hog ratio.
17. MARKETING DAIRY PRODUCTS 301
Valu'o; Perishability; Production; Demand; Marketing
fluid milk; Concentration of milk; Dispersion of milk;
Cooperative associations; Price; Basis of paying farmers:
Flat price, Classification plan, Base-surplus plan; High
prices; Proper price basis; Other factors; The consumer;
Cost of marketing milk; Marketing butter; Trade chan-
nel for butter; Cost of marketing butter.
18. MARKETING COTTON 315
Consumption; Demand; Production; Financing the
growers; Kinds of cotton; Price; Country marketing of
cotton; The cotton gin; Country buyers; Factors; Cotton
merchants; Cooperative marketing associations; Reducing
marketing expenses; Orderly marketing; Pooling; Purchase
of cotton by the mills.
19. PRICES, MARK-UPS, AND MARGINS 327
Importance of selling prices; Factors affecting selling
prices; Customary prices; Odd and even prices; Quantity
xiv Contents
CHAPTBE PAGE
19. PRICES, MARK-UPS, AND MARGINS (Cont.)
prices; Leaders; Theory of using leaders; The one-price
policy; Determining selling prices; Mark-up; The correct
method of figuring mark-up; What is cost? Mark-downs;
Margin; Determining the mark-up percentage; The deal-
er's total margin; Effect of mark-downs; Replacement
costs; Variation in margins; Average margins.
20. OPERATING EXPENSES 344
Expenses; Rent on owned buildings; Interest; Classifica-
tion of expenses; Form of operating statement; Variation
in expenses; Services rendered; Operating efficiency;
Method of measuring efficiency; John Smith as an ex-
ample; What Smith finds.
21. SOME TESTS FOR MERCHANDISING EFFICIENCY . . 357
Tests for efficiency; Volume of sales per person; Employ-
ees perform different services ; Sales per salesman ; Average
sales per person; Irregular sales; Better salesmanship;
Sales training; Pay; Size of sales; Store arrangement;
Rent ; Location ; Sales per square foot ; Customer frontage ;
Uses of capital; Collection period; Collection percentages;
Bad debts; Choosing the best credit policy.
22. STOCK TURNOVER 373
Meaning of stock turnover; How stock turnover is com-
puted; Advantages of rapid rate of stock turnover; Re-
duced expenses; Reduced mark-downs; Reduced margins;
Increased profits; Illustrative figures; How to increase rate
of turnover ; Decreasing stock ; Small-order buying ; Carry-
ing fewer articles; Danger in reducing the number of ar-
ticles carried; Advantages of full stocks; Increasing sales;
Lower prices; Typical rates of turnover; Turnover in-
creases profit,
23. STOCKKEEPING 388
Objects; Model stock; Finding the model stock; Stock-
keepipg systems; Annual inventory with inspection and
want list; Tickler system; Unit control, or perpetual
inventory; Advantages of unit control; Disadvantages of
unit control; Unit control used by a chain of stores; Dol-
lar control; Advantages of dollar control; Disadvantages
of dollar control; Short-cut methods,
Contents xv
CHAPTER PACK
24. STOCK ARRANGEMENT AND DISPLAY 401
Objects; Arrangement; Location and rent; Appearance;
Drawing customers deep into the store; Customers' con-
venience; Facilitating sales; Promoting sales of new goods;
Privacy; Store services; Display; Fixtures; Tables; Wall
fixtures; Display cabinets; Customer frontage; Window
display; Types of windows; Building the display; Store
lighting; Window lighting; Interior lighting.
25. BUYING 420
Success in buying; Present demand; Future demand; Or-
dering and buying; Fashions; Weather; Weather cycles;
Business conditions; The budget; Quality; Prevailing
prices; Future prices; The work of the purchasing agent;
Reciprocity.
26. PROFITS 433
Meaning; Proper basis of profit; Variation in profits;
Object of business not profit; Average profits; Business
success and failure; Business mortality or turnover: Illi-
nois study, Other studies; Whv merchants quit business;
Why merchants fail; Remedies; Examinations.
27. PRINCIPLES OF SALESMANSHIP 447
Salesmanship defined; Steps in a sale; Salesmanship vs.
order-taking; Necessity for salesmanship; Types of sales-
men; Buying motives; The sale analyzed, The preap-
proach; Securing interviews; The approach; The hobby
approach; Securing undivided attention.
28. THE SALES TALK .458
Securing interest; Arousing desire; Meeting objections;
Action; Close on a minor point; The signed order; The
departure; Types of buyers; Constructing the sales talk;
Value of sales talks.
29. RETAIL SALESMANSHIP 469
Problems in retail selling; The preapproach; The ap-
proach; The size-up; The interview; Selling to two people;
Substitution; Creating desire; The close; Suggestive sell-
ing; Telephone selling; Opportunity for real salesman-
ship.
xvi Contents
30. SUCCESS IN SELLING 481
Qualifications for success Knowledge; Securing informa-
tion ; The retail salesman ; Time for study ; Can a salesman
know too much about his product? Personality; Appear-
ance; Facial expression; Voice; Manners; Conversation
Health; Honesty; Industry; Perse\ erance ; Confidence
Enthusiasm; Smcentv; Initiative; Tact; Other traits
All traits not necessary.
31. SALES MANAGEMENT 496
The sales department ; Hiring salesmen : Type of men
needed, Sources of men, Securing applications, Selecting
men; Training salesmen; Supervising salesmen; Stimulat-
ing salesmen; Paying salesmen. Straight salary, Straight
commission, Salary and commission, Bonuses; Organiza-
tion; Territories.
32. ADVERTISING PRINCIPLES AND POLICIES .... 512
Three methods of stimulating sales; Why advertise?
Limitations; What advertising does; Cost of advertising;
Is advertising worth its cost? The advertising policy;
Deciding whether or not to advertise ; Method of distri-
bution; Product; Territory; Financial strength; What to
advertise; How much to spend; Sales; The task to be
done ; When to advertise ; Advertising and the business
cycle; Where to Advertise; Selecting the proper method;
The advertising agency; Planning.
33. ADVERTISING OBJECTIVES. MEDIUMS, AND APPEALS . 526
Kinds of advertising; Purpose; Methods of increasing
sales; Mediums; Newspapers; General magazines; Special-
ized periodicals ; Direct mail ; Outdoor advertising ; Radio ;
Novelties; Dealer helps; Packages and delivery vehicles;
Car cards; Publicity; Selection of proper mediums; The
neighborhood store; The village store; The appeal; Buy-
ing motives; Positive appeal; Fear; Buying motives illus-
trated.
34. PREPARING ADVERTISEMENTS 541
Attention; Size; Shape; Position; The layout; Illustra-
tion; Securing illustrations; The headline; Color; Copy;
Writing copy; A few examples.
Contents xvii
35. BUSINESS ETHICS 560
Business ethics defined; Improvement in ethical standards;
Need for rules and umpires; Agencies; Codes of ethics;
Better Business Bureaus; Statutes against false advertising;
Advertisers in the lead; Federal Trade Commission; Trade
practice conferences; Unfair competition; Practices de-
clared unfair; Deception of buyers; Commercial bribery;
Bonuses to buyer's salesmen; Prices; Boycotts; Exclusive
contracts; Unfair competition under the Nil A; Conclu-
sions.
CHAPTER 1
Meaning and Cost of Distribution
Interest in marketing. — Distribution, or marketing, is
now the most important part of business. Most business
concerns can produce many more goo'ds than they can
sell at a profit. "Give us sales!" is the common cry of
business men, and huge sums are spent on advertising
and salesmanship. "Whatever can be sold can be made."
"There is no longer a problem of production. The big
problem today is distribution." Such statements are
common and may be accepted as generally true, although
there are exceptions.
This condition has not always existed. Up until com-
paratively recent times, the big task of the race was to
produce enough goods — food, clothing, and shelter — to
satisfy its needs. This problem has been altered during
the past 150 years by the use of labor-saving machinery;
by the discoveries and inventions of chemistry, agricul-
ture, physics, and engineering; and by the development
of scientific management and accounting.
The development of the natural sciences and the arts
of physics, entomology, geology, chemistry, management,
and engineering has given us much new knowledge. This
knowledge has enabled us to increase greatly the output
of goods and to reduce the costs of production. The re-
sult is that we are now able to produce many more goods
than the consumers are able to buy at the prevailing
prices. Hence business men and farmers have become
greatly interested in distribution. They wish to find
2 Meaning and Cost of Distribution
buyers for their products and to increase the consump-
tion of their goods.
Distribution a part of business. — Business is divided
into two parts — production and distribution. Produc-
tion, in its business meaning, has to do with the creation
of goods. Distribution, or marketing, has to do with
moving these goods from producers — factories, mines,
and farms — into the hands of the consumers.
Distribution includes buying, selling, advertising,
transportation, and warehousing. The corner grocer, the
drug store, the chain store, the department store, the
mail-order house, the wholesaler, the railroad, the grain
elevator, the milkman, the livestock shipper, and the
public warehouse are engaged in distribution.
Market distribution a part of economics. — Economics
has to do with the way we make a living and the way we
live. For the purpose of this study, economics is divided
into production, distribution, and consumption. Pro-
duction, in the economic meaning, consists in the creation
of utilities — things which satisfy human wants.
The chief utilities are form, place, time, and posses-
sion. Form utilities comprise goods and services.
Bacon, washing machines, radios, airplanes, hats, dental
service, and pictures are examples of form utilities.
Place utilities are created when these goods are taken
from the place of production to the place where they are
to be consumed. Time utilities are created when these
goods are kept until they are wanted. Possession utili-
ties are created by getting goods into the hands of people
wanting them. The creation of place, time, and posses-
sion utilities, in the economic meaning, is a part of pro-
duction. If one is to have clothes, it is just as necessary
that the cotton be stored until needed, brought to the
Meaning and Cost of Distribution 3
places where the consumers live, and got into their pos-
session, as it is that the cotton be grown and the cloth be
woven.
Market distribution includes those activities which
create place, time, and possession utilities. To the
economist, market distribution is therefore part of pro-
duction, as it deals with the creation of utilities. The
business man, however, thinks of distribution as selling
his goods and getting them into the hands of the con-
sumer. To (he economist, marketing is a part of produc-
tion, and "distribution" refers to the distribution of
wealth among the members of society. To the business
man, "distribution" means marketing — selling and trans-
portation.
This difference of definition is confusing to the stu-
dent. In order to use his terms correctly, it is necessary
for him to remember whether he is talking to an econo-
mist or a business man. In this volume, the business
man's definition will be followed. Production will be
used to mean the creation of form utilities or the making
of goods. Distribution will refer to the creation of place,
time, and possession utilities or to the transportation
and sale of goods and services — getting the goods from
the farms and factories to the ultimate consumers.
Object of distribution. — The object of market distri-
bution, as well as of production (farming and manufac-
turing), is to supply human wants — food, clothing, and
shelter. In addition to these primary wants, we have
many other secondary ones. Our wants are expanding;
the number of secondary wants seems almost unlimited.
Ws have many more physical goods and personal services
than our grandparents had; and most of us desire many;
more than we have.
4 Meaning and Cost of Distribution
The larger the quantity of goods and services that
people want, the greater the volume of business that
is possible. As our wants are practically unlimited,
business is capable of almost indefinite expansion. Dis-
tribution operates to satisfy the wants of people — to get
the goods to them — and it often strives to increase the
number of things which people want to buy.
Methods of studying distribution. — Market distribu-
tion deals with services, goods, and men. In order to
market goods, services must be rendered, acts performed,
things done. These services or acts are commonly called
functions.
One method of studying distribution is to take up a
study of the functions involved. This is called the
functional approach, or method.
Another way to study distribution is to study the
various goods, or commodities, that are marketed and to
describe the ways in which they reach the consumers.
This is known as the commodity approach, or
method.
The third method of studying distribution is to study
the operations of men engaged in distribution. These are
called middlemen or institutions. This method is known
as the middleman, or the institutional, approach.
In using the functional approach, we see what services
or functions are performed; what goods they are per-
formed upon; and what middlemen perform them. In
using the commodity approach, we see what goods are
marketed; what functions are performed upon them in
the distributing process; and what middlemen perform
these functions. In using the institutional approach^ we
see what institutions, or middlemen, are engaged in dis-
tribution ; what functions they perform ; and what goods
they handle.
Meaning and Cost of Distribution 5
Advantages of functional approach. — The study of
marketing functions draws our attention to the opera-
tions or services performed in distribution. A study of
these services helps us to analyze the distribution proc-
ess; to see just what is done; how it is done; why it is
done ; and who does it.
The same function may be performed once or several
times. Perhaps a study will point out ways of reducing
the number of times a thing is done. For example, a
goods may be graded every time it is sold. The adoption
of uniform standards and the grading by government-
licensed inspectors may mean that one grading is suf-
ficient for the entire marketing process. All buyers and
sellers may buy and sell on the grade established by the
government inspectors.
It is often said that there are too many middlemen. If
a middleman is eliminated, are his functions eliminated
or are they transferred to others? A study of functions
should help us to answer such questions.
Advantages of commodity approach. — The commod-
ity approach starts with familiar goods. It is a simple
and easily followed method. The disadvantages of this
method are that it involves long descriptions of goods
and operations and involves much repetition, if all com-
modities are studied.
Advantages of middleman approach. — The institu-
tional approach considers the operations of various
middlemen. It is a very practical approach, especially
for the student who later enters business. The danger
of the institutional approach is that it may become too
descriptive. It is not as analytical as the functional
approach.
We shall devote considerable attention to the opera-
tions of middlemen, but before doing so, we need an un-
6 Meaning and Cost of Distribution
derstanding of the various marketing functions. The
commodity approach seems best adapted to the study
of farm products and industrial goods.
Cost of Distribution
Cost of production and distribution. — Market distri-
bution costs more than production. This means that
more than half of the money spent by the consumers
goes to cover the cost of marketing goods, and less than
half to cover the cost of producing the goods. This
statement is based on a large number of studies. It
represents average conditions. In some cases the pro-
ducer receives all of the consumer's dollar, as when a
farmer peddles his eggs from house to house. In others
distribution takes all the consumer's dollar, as when a
farmer ships goods to market which sell for only enough
to cover the transportation costs and commission.
Illustrations: (a) Oranges. — A dollar spent by the
consumer for California oranges is divided as follows:
Grower for fruit on tree * 27.2^
Picking and hauling to shipping point 2.9
Packing 10 3
Selling and advertising 2.5
Transportation and refrigeration 23.1
Jobber's margin 5.5
Retailer's margin 28.5
Consumer pays 100.0^
*Figures are from Annual Report of California Fruit
Growers Exchange and cover the year 1934-35.
The grower receives 27 per cent of the price paid by
the consumers for the fruit on the trees. Picking takes
something like 2 per cent, while marketing takes 71 per
cent.
(b) Cornflakes. — A dollar spent by the consumer
for cornflakes is divided as follows:
Meaning and Cost of Distribution
Farmer
Transportation 15.6
Manufacturing 11.3
Selling expenses 36.8
Profits 14.2
Consumer pays 100.0^
If we divide the profits arbitrarily between production
and distribution, on the basis of expenses incurred in
each, we see that production took 39 cents and market-
ing took 61 cents.
(c) Bread. — A dollar spent for bread at a retail
grocery store is divided as follows, according to govern-
ment figures:
Farmer, to cover cost of producing and marketing wheat 13.4^
Country elevator's margin 0.8
Transportation to and marketing wheat in terminal market. 3.2
Flour mill's margin 4.8
Transportation of flour 3.1
Wholesale baker:
Cost of manufacturing bread 19.9^
Other ingredients (€n addition to flour) 10.8
Selling expense 18 6
General and administrative expenses 2.9
Profit 76
Total to wholesale baker 59.8
Retail grocer's margin 14.9
Price to the consumer
The production and marketing cost of the farmer is
13.4 cents, the flour mill's margin is 4.8 cents, and the
baker's manufacturing cost is 19.9 cents: a total of 38.1
cents to cover production costs and the marketing costs
of the farmer and flour miller. Transportation of wheat
and flour and the marketing of wheat cost 7.1 cents, the
baker's selling expense is 18.6 cents, and the grocer's
margin is 14.9 cents. Here, therefore, 40.6 cents go for
distribution. The remainder of the dollar, 21.3 cents,
goes for other ingredients and to cover the baker's profit
8 Meaning and Cost of Distribution
and general expense. Dividing this sum (21.3 cents ]
arbitrarily, half to production and half to distribution
we reach the conclusion that distribution costs are 51.J
cents and production costs are 48.7 cents. In the lattei
figure, however, are included the marketing costs of th(
farmer and the flour miller, which are not shown sepa-
rately in the above table.
(d) Shoes. — A dollar spent for shoes was dividec
as follows by a government commission :
Raw materials 41.1^
Manufacturing costs 17.2
Manufacturer's general and selling expense. 105
Manufacturer's profit 2.7
Retailer's expense 25.4
Retailer's profit 3.1
The consumer pays 100 .0^
Out of $10 spent for shoes, $4.11 goes for raw materi-
als; $1.72 for manufacturing cost; and $2.85 to the re-
tailer. These figures on their face indicate thai
production takes more than half of ihe consumer's dollar
Raw materials and manufacturing costs, plus two-third:
of the manufacturer's general and selling expenses anc
profit, amount to $6.71, or two-thirds of the price paic
by the consumer for shoes.
Let us, however, look at these figures a little mor<
closely. Forty-one cents out of each dollar was spent b]
the manufacturer for leather and other raw materials
Now, the cost of these materials was made up in no smal
part of distribution costs. Leather comes from hidei
and skins, and these come from animals raised in variou:
parts of the world. There is, first, the cost of marketing
the live animals, and next, the cost of getting the skin
to a tanner. The tanner sells the leather; then th(
leather must be transported to the shoe factory. It thui
appears that a very considerable portion of the cost o
Meaning and Cost of Distribution 9
raw materials goes for distribution. If one-half of this
cost be assumed to represent distribution, then about 47
per cent of the price paid by consumers for shoes goes
for production and about 53 per cent for distribution.
Total cost of marketing. — The author has estimated
that of the total amount of money expended by the Amer-
ican consumer for goods, 52 per cent goes to cover mar-
keting costs and 48 per cent to cover production costs.1
These percentages probably do not apply to the mar-
keting of services, recreation, and travel (such as medi-
cal services, theaters, railroads, public utilities). Such
services appear to be sold relatively more cheaply than
goods, as fewer middlemen are involved and the producer
often comes into direct contact with the consumer.
Why are marketing costs so high? — According to
Census figures, more people are engaged in production
than in marketing. Production also appears to employ
more capital, owing to the relatively heavy investments
in factories, machinery, farms, mines, forests, and oil
wells. Yet distribution costs more than production.
This fact is apparently explained by the relatively high
earnings of people in some marketing work (for example,
operating railroads and wholesale houses) and the rela-
tively low earnings of farmers. In considering the low
average income of the farmers, it should be remembered
that they raise most of their food, a considerable portion
of their fuel, have no house rent to pay, and do not have
to pay carfare to and from work and buy lunches as do
many city workers. Nevertheless, their average money
income is low and pulls down the average for the produc-
tion group.
One reason for the high costs is that the study of mar-
1 Converse, Paul D.: Elements of Marketing, rev. ed., New York,
Prentice-Hall, Inc., 1935, Appendix.
10 Meaning and Cost of Distribution
keting is relatively new, while chemistry, physics, agri-
culture, engineering, and mining have been studied for
decades. The first textbook on market distribution
appeared scarcely 20 years ago, and only since 1915 has
serious market research been undertaken. The govern-
ment has for many years taken censuses of agriculture,
manufacturing, and mining; but the first Census of Dis-
tribution was taken in 1930.
Second, power-driven machinery has been applied to
manufacturing and farming. Distribution, with the ex-
ception of transportation, remains largely a hand
industry. It employs relatively few mechanical aids.
Third, there are many wastes and risks in distribution
— poor packing of goods for shipment, poorly designed
and inadequate facilities for handling goods in many
cities, and lack of standardization. There is much dupli-
cation of effort : many salesmen call upon the same buy-
ers; competing delivery wagons cover the same streets;
small competing stores stand side by side; much adver-
tising is wasted.
Fourth, there are many risks. Goods spoil and go out
of fashion; prices may fall while goods are in stock;
goods may be stolen or destroyed by fire.
Transportation as an element in marketing cost. —
Large-scale production means that large factories are lo-
cated in regions that are especially adapted to the pro-
duction of given products. Therefore goods must be
transported long distances to the consumers. The con-
sumers today want a great variety of goods, many of
which are brought from distant parts of the world.
Service as an element in cost. — A part of the high cost
of distribution is often blamed on the services furnished
the consumers. It is said that the consumers want a
great variety of goods upon an instant's notice; that
Meaning and Cost of Distribution 11
they buy in very small quantities; that they want much
credit; that after making purchases they frequently
change their minds and return goods to the stores; that
they want instruction in the use of goods; that they
want the goods repaired free of charge; that they want
goods delivered; that they want to trade in stores with
expensive fixtures; and that they expect to be waited
on the instant they enter a store.
Such services increase the cost of marketing and prices.
Some assume that the higher prices injure the consumer.
Services may or may not be worth their cost to the
consumer. To illustrate : Mrs. Jones may prefer to visit
the grocery store, pay cash for her groceries, and carry
them home. On the other hand, Mrs. Smith may be a
very busy woman. She may have heavy home duties and
may prefer to spend her leisure in reading, working her
garden, or playing golf. She wants to order her groceries
over the telephone and have them delivered. Now, in
the town where the Joneses and Smiths live it may cost
10 cents to deliver an order of groceries and 5 cents to
enter the charge on the books. Delivery and credit serv-
ice are worth 15 cents to Mrs. Smith, because she values
her time more for other purposes. The services are a
utility to her. She is not injured by the grocer's charge
for them. Mrs. Jones, on the other hand, does not want
these services and is injured if she has to pay for them.
Have marketing costs increased? — It has been stated
that during the past century production costs have de-
creased while distribution costs have increased, and that
distribution now takes a larger percentage of the con-
sumer's dollar than formerly. Even if true, this does
not prove that distribution costs have increased abso-
lutely, even if they are measured in terms of money with
a stable purchasing power. The increase may have been
12 Meaning and Cost of Distribution
entirely relative. To illustrate, at a former time it may
have cost 40 cents to produce an article and 20 cents to
market it. The price to the consumer was 60 cents. At
the present time, owing to improvements in methods of
production, the cost of producing this article may have
fallen to 20 cents, while the distribution costs have re-
mained stationary. The price to the consumer is 40
cents.
Past Period Present Period
Production costs 40^ 20^
Distribution costs 20 20
Price to consumer 60^ 40^
In the past period production took two-thirds and dis-
tribution one-third of the price to the consumer. At the
present time distribution takes one-half of the consumer
price. The consumer is benefited, for she receives the
article 20 cents cheaper than she did in the past.
Distribution costs may actually decrease and yet take
a relatively larger portion of the consumer's dollar.
Past Period Present Period
Production costs 40^ 20^
Distribution costs 20 15
Price to the consumer 60^ 35^
In this case, marketing costs have decreased 5 cents,
and yet in the past period marketing took 33% per cent
of the consumer's dollar, while at present it takes 43 per
cent.
Marketing costs may increase while the price to the
consumer decreases.
Past Period Present Period
Production costs 40tf 20tf
Distribution costs 20 30
Price to consumer 60^ 50^
Meaning and Cost of Distribution 13
Although marketing costs increased 10 cents, the con-
sumer is not injured, as he receives the articles for 10
cents less than he did in the past period. The consumer
would be injured, however, if distribution costs increased
more than the production costs decreased.
Marketing costs should be reduced. — The people en-
gaged in marketing should not be satisfied with their
record. Distribution costs as well as production costs
should be reduced. A leading merchant says that he will
consider his business life a failure if he does not succeed
in bringing down the cost of retailing. Men engaged in
distribution should not be satisfied to see all the laurels
go to the production men. The man who reduces the
cost of distribution does just as much to increase the
standard of living and the well-being of the people as
does the inventor of a machine which reduces the cost of
production.
In order to reduce costs, marketing should be studied.
Market research is needed. Improved methods will come
from study and research.
Chapter 1
Review Questions
1. Which is more important today, production or market-
ing? Why? Which costs more?
2. Why has our capacity to produce goods increased
faster than our capacity to market them?
3. Define economics.
4. Define distribution (or marketing).
5. What is the relation of distribution to business? To
economics?
6. What is meant by utility? What utilities are crea-
ted in the process of distribution?
14 Meaning and Cost of Distribution
7. What arc the two meanings of distribution?
8. What are the two meanings of production?
9. What is the object of marketing?
10. What are the three ways of studying market distri-
bution? What is the chief advantage and disadvantage of
each method?
11. Enumerate the costs included in the price of a loaf of
bread; of a pair of shoes.
12. Why are distribution costs so high?
13. Are the consumers benefited or injured by the liberal
services offered today by the sellers?
14. "Large-scale production increases transportation costs."
Comment on this statement.
15. Why are marketing costs said to have increased dur-
ing the past century?
Thought Problems
1. What do people want? Do most people have all the
things they want? How does market distribution operate to
supply human wants?
2. Does the getting of the things we want make us happy?
3. How can people be made to want more things? Name
all" the ways you can think of and indicate those which you
consider are the most important.
4. Should people be made to want more things?
5. The offering of so many services by sellers is given
as one reason for the high cost of distribution. Some people
assume that these services are rendered by the sellers in the
competitive struggle for business and that the consumers
are injured by the high cost of rendering these services. Do
you agree? Why or why not?
CHAPTER 2
What Marketing Involves — Marketing
Functions
Functions or services involved in distribution. — If
goods are to be distributed, services must be performed.
Work must be done to get goods to the consumers. The
acts, services, or operations performed in getting goods
from the producers to the consumers are called functions.
The marketing functions. — The two main groups of
functions in distribution are: (1) the change in owner-
ship (title) and (2) the physical handling of goods. The
first creates possession utility, and the latter, place and
time utilities. The marketing functions are classified
below. Certain general business functions which are in-
volved in marketing are included :
A. Change of ownership:
1. Buying;
2. Selling.
B. Physical handling of goods:
3. Transporting;
4. Storing;
5. Packing;
6. Standardizing and grading;
7. Assembling;
8. Dividing.
C. General business functions involved in marketing:
9. Financing;
10. Risking;
11. Recording;
12. Managing.
15
16 Marketing Functions
Buying
Goods must be bought or produced before they can be
sold. When they are produced, raw materials, operating
supplies, and machinery must be bought. We thus think
of marketing as beginning with buying. Buying is im-
portant both to business men and to consumers.
The present-day consumer buys a great variety of
goods — meats, vegetables, cereals, butter, cheese, and
other foods ; cloth, shoes, hats, and ready-made garments
for clothing; furniture and house furnishings; medicines
and toilet articles; automobiles, tires, and gasoline; and
amusements.
Most consumers do not have enough money to buy
everything they desire, and must choose those things
which are best adapted to their needs and pocketbooks.
The consumer has been accused of using poor judgment
in buying. With the great variety of goods to be bought,
it is next to impossible for one person to be a good judge
of the qualities and merits of all the goods purchased.
Buying function analyzed. — The buying function may
be divided as follows:
(a) Determining needs;
(b) Finding sources of supply — sellers;
(c) Negotiating prices and other terms;
(d) Obtaining title to the goods (legal part of buying).
Determining needs. — The manufacturer, the mer-
chant, and the consumer must determine their needs.
Their problems are somewhat different. The business
concern buys with the needs of the customer in mind,
while the consumer buys to satisfy his own wants.
The business concern should study its past sales records
to determine trends in demand. From these records it
can determine the types of goods and prices suited to its
Marketing Functions 17
customers. It should study trends in fashion. The
large business concern often has a laboratory where pro-
ducts are tested to determine their actual qualities and
their suitability to the buyers' needs.
The ultimate consumer must determine how he will
spend his money. He often weighs the relative advan-
tages of one purchase against another. It may be a new
automobile, a year in college for his son, new furniture
for the home, or a vacation trip for the family.
Finding sources of supply. — Under present conditions,
the sellers usually seek the buyers, but in spite of this
practice the buyer often needs to hunt a seller. The
buyer may want a new or a different product, and no
salesman offering this product may call.
Negotiating terms. — In retailing, many stores have
adopted the one-price policy. In such stores the customer
buys at the specified price or does not buy. He may,
however, shop from store to store for a lower price. In
wholesaling, however, there is much room for price nego-
tiation. Orders may go to the lowest bidders. Many
sellers may be after the same order. Credit terms, time
for delivery, payment of freight, repair service, guarantee,
and other terms may be negotiated.
Obtaining title. — The buyer must obtain legal title
to the goods before a purchase is completed. The pass-
ing of title may be taken for granted in ordinary pur-
chases, but in case of a dispute, the time and place where
title passes from seller to buyer are important. Where
large amounts are involved, or where goods are made to
order, formal contracts are often used.
Selling
Selling function analyzed. — Most business men say
that selling is the most important distributing function.
18 Marketing Functions
The man who can sell his goods at a profit is successful,
while the man who cannot sell his product is a business
failure, no matter how good his product may be. The
selling function may be divided as follows :
(a) Creating demand;
(b) Finding buyers;
(c) Giving buyers advice;
(d) Negotiating terms;
(e) Transfer of title.
Creating demand. — By creating demand we mean
arousing the desire for things among people who have
ability to buy them. If people can be made to want
things badly enough, they may work harder or more in-
telligently in order to secure the money with which to
buy them. Some explain the development of civiliza-
tion by saying that people were made to want things, and,
in order to satisfy their desires, they worked and
schemed. As a result of this work came development.
According to this reasoning, the salesman and the adver-
tiser who arouse our desires for new or better things help
to develop civilization. On the other hand, some say that
we are oversold and are too dissatisfied to get the most
enjoyment out of life. Lack of space forbids a discussion
of this idea here.
New things, better things, more beautiful things are
constantly being placed on the market. People must be
made to want these things. The seller may use adver-
tising, personal salesmanship, or publicity to create de-
mand. He may display and demonstrate the goods, give
away samples, and try to "educate" the buyers to the
advantages of his product. Much advertising and a
goodly portion of personal salesmanship is used to create
demand.
Marketing Functions 19
Finding buyers. — A good deal of the selling effort is
directed to finding people who already want the product.
Want ads are almost entirely directed to people who are
already conscious of a need. Many retail salespeople
assume that people know what they want when they
enter a store. Many traveling salesmen are in reality
"order takers" who simply take orders from people who
know that they need the goods offered by the salesmen.
Most price advertising is aimed at people who already
want the goods.
Giving advice. — The seller often gives advice to buy-
ers. This advice may relate to the use of the product,
or it may be much broader and be given to help the buyer
determine his needs or to conduct his business more effi-
ciently. Many buyers depend upon the sellers to teach
them to use and repair their goods. By helping the
buyer to secure the best use from his products, the seller
secures satisfied customers and a reputation for his goods
which helps to increase sales. The seller may go farther
and help the buyer with the conduct of his business:
he may give advice on stockkeeping, advertising, window
display, bookkeeping, buying, or salesmanship. He does
this to build up goodwill or to make the buyer a better
business man, so that he will sell more of the seller's
goods.
Negotiating terms. — The negotiation of terms and the
transfer of title were discussed above.
Transporting
Transportation involves getting goods and services
from the places where they are produced to the places
where they are wanted by the consumers. This is what
in economics we call the creation of place utility.
Civilization in no small degree has been made possible
20 Marketing Functions
by transportation. It permits the exchange of goods be-
tween sections with different resources, climates, and in-
dustries. It enables goods to be produced in places that
are best adapted to their production. Factories can be
located near raw materials, labor supply, power, or the
consumers. Foods can be grown in regions that have soil
and climate adapted to their production. Through the
production of goods in favorable regions, production costs
are reduced.
Transportation enables us to secure a great variety
of goods. We secure tea, rubber, and silk from the
Orient; coffee from Brazil; sugar from Cuba; cocoa from
Africa and South America; iron ore from Minnesota;
oranges from Florida and California; wool from Aus-
tralia; canned salmon from Alaska; canned pineapples
from Hawaii; and so on for hundreds of other products.
Transportation enables us to have many fresh goods,
such as fruits and vegetables, the year around.
Goods moved by owners and agents. — Goods may be
moved by their owners or by hired agents. The farmer
often hauls his goods to the railroad station, while the
manufacturer and merchant often deliver goods to
customers in their trucks. Customarily, however, goods
are moved by agents such as railroads, express companies,
trucking companies, and steamship lines.
Methods of transportation. — Goods are moved by rail-
roads, trucks, barges, ships, airplanes, pipelines, and
animals and human beings.
Local transportation appears to cost more than rail
transportation. The handling of goods between facto-
ries, stores, warehouses, trucks, and freight cars is one of
the most expensive parts of transportation. One study
showed that the cost of packing, carting, loading, un-_
Marketing Functions 21
loading, and unpacking 20 commodities was nine times
as much as the freight paid to the railroads for moving
them.
The motor truck is used in local transportation. It is
a feeder for the railroads, and is also an important com-
petitor of the railroads for long-distance traffic. The
airplane offers great possibilities and is already impor-
tant in carrying passengers, express, and mail. Pipe lines
are important in moving oil and gas. In international
trade, water transportation is necessary. In the United
States, inland water transportation is relatively unim-
portant except for the movement of iron ore, coal, grain,
and other commodities on the Great Lakes.
In the movement of passengers, the passenger auto-
mobile, the street car, the motor bus, and the railroad
are the important agencies. In total mileage the auto-
mobile comes first.
Our transportation system. — We have 3,000,000 miles
of rural highway and 250,000 miles of city streets. One-
third of the rural highway is improved, and 10 per cent
is included in state highway systems. Most of the city
streets are surfaced. We have 25,000,000 automobiles
and trucks; 250,000 miles of railway line; 50,000 loco-
motives; 2,000,000 freight cars; 50,000 railroad passenger
cars; and 27,000 miles of navigable rivers and canals, of
which 5,000 miles have a depth of over six feet.
The railroads move goods and people, but freight
transportation is their most important business. Ex-
cluding purely local truck movements and goods moved
by their owners, the railroads move about one-half of the
total freight of the country. The railroads, however,
move goods for longer distances than trucks and river
carriers, so that they carry nearly three-fourths of the
22 Marketing Functions
traffic load as measured in ton miles.1 Prior to 1930 they
carried 1% billion tons of freight yearly. This was more
than 50,000,000 carloads. Rail traffic declined some 40
per cent in the early 1930's owing to the business de-
pression and the competition of motor trucks. At this
writing, rail traffic is increasing, but some of the railroad
business seems permanently lost to the trucks. No com-
plete census has been taken of truck traffic. Intercity
traffic runs into hundreds of millions of tons, and, count-
ing all local traffic, the total is much more.
Vessels on the Great Lakes moved an average of
125,000,000 tons annually during the decade ending in
1932. Most of this traffic consisted of iron ore, coal,
stone, and grain. During the same decade, the rivers
and canals of the country moved 200,000,000 tons annu-
ally, most of which was moved for short distances (av-
eraging about 50 miles). One-fourth of the river
traffic involves shipments of gravel, sand, and cement,
most of which is used in construction operations on the
rivers.
Figures showing the amount of goods transported in
1932 are given in Table 1. It should be remembered
that 1932 was a poor business year, in which the amount
of traffic was low. The figures for truck movements
cover only intercity movements of goods carried by
trucks operated for hire. A very large amount of traffic
is moved between cities by merchants and manufac-
turers. The for-hire intercity trucks made up only 6
per cent of the total number of trucks in operation, in-
dicating that the majority of trucks are used for local
hauling and for long-distance movement by the owners
of goods.
1 A ton mile is a unit of measurement denoting the movement of
one ton of goods one mile.
Marketing Functions 23
|T ABLE 1.— TRAFFIC MOVED BY VARIOUS CARRIERS IN 1932
Type of Carrier
Railroads
Great Lake vessels . .
Pipe linos (petroleum)
Intercity trucks
River and water car-
riers . .
Electric railways and
airplanes
Totals
Tons Moved
(thousands)
Per Cent
of Total
Ton Miles
(millions)
Per Cent
of Total
678,854
39,544
80,029
299,768
53.9
3.1
6.3
23.8
235,309
24,734
19,600
29,977
73.9
7.8
6.2
9.4
151,276
12.0
7,910
2.5
11,661
0.9
583
0.2
1,261,132
100.0 318,113
100.0
Cost of transportation. — The total cost of transporta-
tion, including the operation of railroads, automobiles,
trucks, buses, pipe lines, airplanes, and vessels on inland
waterways, and including the cost of building and main-
taining our highways and streets, is some 20 billion dollars
annually, and this figure does not include the total cost
of loading and unloading goods at stores and warehouses.
A very considerable part of this cost covers the move-
ment of people who are traveling for pleasure rather
than business. The cost of transportation may be said
to equal approximately one-fourth of our national in-
come. This indicates that transportation is one of the
most expensive of the marketing functions.
Services rendered by railroads. — The railroad moves
freight in carload quantities (c. 1.) and in less-than-
carloads (1. c. 1.). The rates are lower on the former.
Carload freight is handled in larger quantities, and the
shippers usually load the goods into cars at the place of
shipment and unload the goods from the cars at their
destination. The railroads place ("spot") the cars on
sidings convenient to the shippers. The railroad usually
loads and unloads less-than-carload shipments. In the
24 Marketing Functions
past, the rail haul began and ended in the rail terminals.
If a shipper did not have a siding, he delivered his goods
to a railroad-owned siding or freight house. The ex-
press company for many years has picked up packages
from the shippers7 doors and delivered them to the door
of the consignees. This pick-up and delivery service
is known as "store-door delivery." Motor-truck car-
riers commonly give this service. In order to meet truck
competition, many railroads are giving free store-door
delivery on less-than-carload shipments, and this will
probably soon be done by all the railroads. The prac-
tice could also be applied to carload shipments.
Liability of common carriers. — A common carrier is
one who holds himself out to the public to move goods
or persons for pay. A common carrier should not be
confused with a carrier for hire, who moves goods or per-
sons under special contract and does not hold himself
out to move goods for anyone who may apply. The
common carrier must serve all equally at reasonable
prices. He cannot refuse to serve as long as he has fa-
cilities available. He is responsible for the safe delivery
of the goods or persons in his care. He is excused for
damage to goods or injuries to persons only for such
causes as acts of God, acts of a public enemy, acts of
shippers, acts of public authorities, or loss caused by the
inherent nature of the goods. This heavy responsibility
upon the common carrier seems reasonable, as the ship-
per ordinarily cannot tell when, where, or why his goods
are lost or damaged while they are in the hands of the
carriers.
Bills of lading. — The contract between the railroad
and the shipper is called a bill of lading. The bill of
lading is a receipt for the goods, a contract for the trans-
portation of the goods, and a shipping order.
Marketing Functions 25
There are two kinds of bills of lading. The straight
bill is used for ordinary shipments. A copy is sent to
the consigne^who presents it to obtain the goods from
the carrier. The order bill is used by the shipper when
he wishes to collect from the buyer before the buyer ob-
tains the goods. The seller ships the goods to his order,
draws on the buyer, attaches the draft to the order bill,
and sends these to the buyer's bank for collection. When
the buyer pays the draft, the bank delivers the bill of
lading to him. He takes this to the railroad and obtains
the goods. The order bill of lading carries title to the
goods and is negotiable.
Demurrage. — Shippers and receivers are allowed a
stated amount of time in which to load and unload cars.
This free time is usually 48 hours from 7 A.M. on the day
following the spotting (placing) of cars or the notice of
arrival. If cars are held longer, an extra charge known
as demurrage is made.
Reconsignment. — Many goods are shipped before they
are sold and are sold while they are in transit. The ship-
per then changes the destination of the goods. This
change is known as diversion. When goods reach their
destination, they may be reconsigned to another point.
The through rate from the point of origin to the new
destination applies when shipment continues in the same
direction, but an extra charge for the reconsigning priv-
ilege is added.
In-transit privileges. — Goods are often stopped while
in transit for manufacturing, storing, feeding, grading,
pressing, or fabricating. Shippers are often allowed in-
transit privileges, by which they pay only the through
rate from the point of original shipment to the destina-
tion of the processed goods plus a relatively small in-
transit charge.
26
Marketing Functions
Suggestions for improved service. — Although our rail-
road service is fairly good, there is room for improve-
ment, especially in speeding up the delivery of freight.
Delays occur particularly in the terminals in the larger
('<i'irt<'*u J't-nnxi/trania, Railroad.
Fig. 1. — Unloading steel freight containers from a flat car to
a truck by means of an overhead crane. These containers are
loaded at the shipper's plant and are unloaded at the buyer's place of
business. Some railroads are using containers in an attempt to hold
more of the l.c.L business in competition with motor trucks.
cities. Some of the proposals for improving the services
are: the use of smaller trains, such as units powered by
Diesel engines, for branch-line service and fast passenger
trains; electrification of the railroads, especially across
mountains and in cities where the traffic is heavy; the
pooling of freight cars, so that they can be used wher-
ever they are most needed; the operation of all the ter-
Marketing Functions 27
minal facilities within a city by one terminal company
so as to expedite the movement of goods through the
city and better serve the shippers; improved mechanical
devices for loading and unloading cars; and the use of
containers holding several tons, which are moved to and
from the railroad cars by motor trucks.
Services performed by motor trucks. — The 3,500,000
motor trucks are a very important part of our transpor-
tation facilities. They are engaged very largely in local
service — delivering goods to the customers by retail and
wholesale merchants, hauling goods to and from the rail-
road terminals, hauling goods from farms to shipping
stations, and moving goods within cities.
Trucks, however, arc coming more and more to move
goods between towns served by the railroads. Even if
the cost of moving goods by truck is higher than the
railroad rates, the truck may be used because of other
economies. It moves goods from store door to store
door. When less-than-carload shipments are made by
rail, the goods must ordinarily be loaded on the truck,
hauled to the freight house, unloaded, loaded into a
freight car, unloaded at destination, loaded into a truck,
hauled to the store of the buyer, and unloaded. If a mo-
tor truck is used, it may load the goods at the shipper's
door and carry them directly to the warehouse of the
receiver. Thus one motor haul is substituted for two
motor hauls plus one rail haul.
For long distances the railroad appears to have lower
costs, owing to the fact that a train moves a much larger
load than does a truck. A freight train with a crew of five
men may move from 2,000 to 5,000 tons of freight, or 400
to 1,000 tons per man. A man on a motor truck may
move anywhere from a few hundred pounds up to 5 or
10 tons. If the average load per man on a freight train
28 Marketing Functions
is 600 tons and the average load per man on a truck is
3 tons, then one man on a freight train moves 200 times
as much as one man on a truck. Yet in spite of this, the
movement of goods by truck has grown tremendously.
Goods are moved by truck for hundreds of miles, and
hauls of over 1,000 miles are not unusual. Some of this
growth in truck transportation is due to quicker deliv-
eries and flexible movements by trucks; to the conven-
ience of store-door deliveries; to the avoidance of delays
and damages in rail terminals; to savings in crating and
handling costs; to the shortening of trade channels and
the lessening of other marketing costs; and to cheaper
labor employed in trucking. The latter two reasons are
very important. Truckers often buy goods at the place
of production and sell to buyers at the destination — a
procedure that often saves the expense of handling by
one or more middlemen. It will be shown in later chap-
ters that trucking often reduces marketing expenses so
that total marketing costs can be reduced even though
higher transportation costs are incurred. The wages of
truck drivers are much lower than the wages of train-
men. Under the NRA code, for example, minimum
wages for truck drivers were set at 30 to 55 cents per
hour, while trainmen are commonly paid more than dou-
ble this rate. In periods of business depression, many
trucks are operated by owners who would otherwise be
unemployed. Many persons buy or rent trucks (often
used trucks) and go into the trucking business. They
may be willing to work very cheaply until business im-
proves so that they can get better jobs.
It is doubtful whether the tax systems of many states
require the truck operators to pay their proportionate
share of the costs of building and maintaining the high-
Marketing Functions 29
ways. If this share is not paid, the trucks are given arx
artificial advantage over the railroads which must build,
maintain, and pay taxes on their roads.
Services of passenger automobiles. — There are 22,-
000,000 passenger automobiles registered in the United
States. These cars are used for both pleasure and busi-
ness. The average annual mileage of these cars has been
estimated at 5,600. If the average number of passengers
per car be taken as two, then the total annual passenger
miles 2 are some 250 billions. This figure is twelve times
the passenger mileage of the railroads.
The automobile has probably done more to affect our
methods of living than any other invention since the
steam locomotive. The automobile furnishes fast trans-
portation adapted to the needs of the individual. It
has led to the building of a wonderful system of paved
highways. It has increased travel, brought formerly iso-
lated communities into touch with the outside world,
helped education, and shifted retail trading areas. It
has increased the mobility of trade. The family with a
car does not have to trade at the nearest store. It can
visit local stores, or stores located at a distance or in
other towns. The automobile has changed our methods
of living and so affected our demand for goods and serv-
ices.
The automobile and truck have also affected business
methods. Many traveling salesmen use automobiles and
so call upon retailers more frequently than when they
traveled by train. The motor truck has increased the
frequency and speed with which goods are delivered
from producers to jobbers and retailers.
2 The passenger mile is a unit of measurement denoting the move-
ment of one person one mile.
30 Marketing Functions
Chapter 2
Review Questions
1. What is meant by "marketing functions"? Why should
they be studied?
2. Enumerate the various marketing functions.
3. What is meant by "buying"? What are the subdivi-
sions of the buying function?
4. What is meant by "determining needs"?
5. How do the business concern and the consumer de-
termine needs?
6. What is meant by "seeking out sources of supply"?
When is it necessary for the buyer to seek out the sellers?
7. What is meant by "negotiating terms"?
8. What is meant by "obtaining title"?
9. What is meant by "selling"? What are the different
divisions of the selling function?
10. What is meant by "creating demand"? How can de-
mand be created?
11. How does the seller find buyers for his wares?
12. What is meant by "giving advice to the buyers"? Why
does the seller give such advice?
13. What is meant by "standardizing"?
14. What is meant by "uniform standards"? How can
uniform standards be secured?
15. What wastes are due to a lack of standardization?
16. What is transportation? What utility does it create?
17. What different methods of transportation arc impor-
tant? What do they cost during a year?
18. Under what conditions are goods transported by agents?
19. What is a common carrier?
20. What is the liability of a common carrier?
Marketing Functions 31
21. Distinguish between straight and order bills of lading.
22. Of what does our transportation system consist?
23. What is c.l. freight? L.c.l. freight? Why the difference
in rates?
24. What is demurrage?
25. What is diversion? Reconsignment? (What rate is
charged in each case?)
26. What is meant by in-transit privileges? (What rate
is charged?)
27. What suggestions can you make for improving rail-
road service?
28. What services are performed by motor trucks?
29. What are the advantages and disadvantages of the
motor truck in comparison with the railroad?
30. What services are performed by passenger automo-
biles?
31. How has the automobile affected the marketing of
goods?
Thought Problems
1. It is said that we have too much salesmanship — that we
are "over-sold." It is said that we need more buymanship,
meaning that the consumers should devote more time and
attention to buying. Comment on these statements.
2. It has been said that the desire for things is the main
factor in causing people to work, and that only as a result
of work has civilization been developed. According to this
viewpoint, the person who makes people want more things
is a benefactor of mankind. Do you believe that people are
benefited by being made to want more things?
3. It was formerly the practice for retail dealers to mark
their prices in code and for the sellers and buyers to higgle
over prices. Higgling is still common in many foreign coun-
tries.
By the "one-price policy" we mean that the seller places
32 Marketing Functions
his price on the goods; that the same price applies to all
comers; and that he will not sell for less than the marked
price. What are the advantages and disadvantages of this
policy?
4. Why is there more higgling over prices in the whole-
sale than in the retail trade?
5. Would the establishment of standards by the govern-
ment, and the requirement that all sellers label their goods
with the established standard, reduce economic wastes?
Would you say that the following are standard products:
Heinz baked beans? Listerine shaving cream? Gillette
razors? No. 2 red winter wheat? Sunkist oranges?
6. We spend much effort and money to reduce transporta-
tion costs. Then we enact high tariffs to make it more ex-
pensive to take goods from one country to another. Can
you explain this inconsistency?
7. What suggestions can you make for improving railroad
freight service?
8. Should motor trucks be taxed enough to cover their
share of the costs of building and maintaining the highways
and streets? Are they so taxed in your state?
9. What is the proper place of the motor truck in our
transportation system?
10. What is the proper place of inland water transporta-
tion in the United States?
11. Who should pay the cost of improving and maintaining
our inland waterways (including the cost of building and
operating necessary locks) ? How should the money be col-
lected?
12. What do you think of the future of air transportation?
13. Should the railroads be allowed to abandon branch
lines when the operation of such lines involves a loss to the
railroads?
CHAPTER 3
Marketing Functions (Continued)
Storage
Storage creates time utility. — Storage is the keeping
of things from the time they are produced until they are
needed by consumers. Primarily it creates time utility.
It gives the consumer an even or regular supply of goods
throughout the year, although many goods are produced
only at certain seasons. Wheat, corn, cotton, tobacco,
and apples are harvested during relatively short periods,
but the public wants these goods from day to day. Stor-
age is necessary to supply this continuous demand.
The production of many other goods is irregular. Cows
give more milk and hens lay more eggs in the spring
and summer than during the fall and winter, but con-
sumers want about the same quantity of butter and eggs
throughout the year. Storage is therefore utilized to
keep some of such irregularly produced products from
the period of surplus production to the period of de-
ficient production. Without storage, prices would be
so high during the fall and winter that many of us would
have to go without butter and eggs. On the other hand,
prices would be so low during spring and summer, owing
to surplus production, that the markets would be de-
moralized and the farmers discouraged.
Influence of storage on prices. — Storage tends to
equalize prices. Let us take butter as an example. The
heaviest production comes in the spring, and since the
33
34 Marketing Functions (Continued)
price drops at this time, dealers buy butter for storage.
This demand keeps the price from dropping as low as
it otherwise would. In the fall and winter, when less
butter is produced, the storage product is placed on the
market, and this additional supply keeps the price from
going as high as it otherwise would. The effect of stor-
age in stabilizing prices may be illustrated by the prices
of butter before and after the introduction of cold stor-
age. The first period selected for study was 1880 to
1884, before cold storage was available. The second pe-
riod, 1910 to 1914, was after cold storage facilities were
well developed. Elgin (Illinois) prices were used for
both periods.1 Before cold storage was introduced, the
average high winter price for 120 per cent above the
low spring price. After cold storage was in use, the av-
erage high winter price was only 49 per cent above the
low spring price.
Five-Year
Periods
1880-1884
1910-1914
Average of the
Low Spring
Prices
1»J#
Average of the
High Winter
Prices
42 J#
36^
Percentage of
Fluctuation
Between High
and Low
Prices
120%
49
Storage supplies seasonal demands. — The demand for
many products is seasonal or irregular. Electric fans are
purchased largely during summer heat waves. Ice skates
and sleds are sold in largest numbers during the winter.
Jewelry and toys are sold in largest quantities just prior
to Christmas. Fireworks are sold in largest quantities
for the Fourth of July and Christmas. Bathing suits,
fishing tackle, electric heaters, gloves, and hunting sup-
plies are also largely seasonal in their sale. If factories
1 Hibbard, B. H.: Marketing Agricultural Products, Ch. 8.
Marketing Functions (Continued) 35
producing such seasonal goods are to be operated regu-
larly, part of the goods produced during the dull months
must be stored to meet a later demand.
Reserve stocks. — Reserve stocks are necessary to guard
against interruptions in production and transportation.
Production may be interrupted by fires, strikes, floods,
drouths, or other causes. Some manufacturers carry
large reserve stocks outside their factories to care for
their customers in case production is stopped.
Transportation may be interrupted by storms, strikes,
wrecks, or floods. Ice stops water transportation on
northern waters during the winter. Motor-truck trans-
portation is often interrupted by snow and ice. Sup-
plies are often stored near the consumers to care for
interruptions in transportation.
Costs of storage. — Storage involves cost for space, for
labor in placing goods in the storage warehouse and tak-
ing them out, for interest on the capital tied up while
the goods are in storage, for insurance, and for loss and
deterioration of the goods.
Storage involves risk. Goods may shrink in weight,
rot, be stolen, or be burnt. They may be damaged by
moisture or vermin, they may go out of style, or the
price may decline.
People incur these expenses and risks in the hope of
making a profit. Profit is expected from an advance in
the price of the goods while they are in storage.
Kinds of storage. — There are many kinds of goods.
Some are non-perishable and require no special protec-
tion. Ores, pig iron, and rough lumber are often stored
in the open, while relatively non-perishable goods, such
as grains, cotton, wool, and dressed lumber, need only
be kept in dry places. Some products are semi-perish-
able. They can be stored for considerable periods under
36 Marketing Functions (Continued)
proper conditions. In this class come such goods as ap-
ples, butter, and potatoes, which should be kept cool and
at even temperatures. They are often stored in cold-
storage warehouses. Some goods are highly perishable
and can be stored for only short periods. Peaches, straw-
berries, tomatoes, and fluid milk furnish examples.
Quick freezing. — New and improved methods of stor-
ing have been introduced which increase the number of
products that can be stored successfully. Recently quick
freezing — freezing at very low temperatures — has
changed the marketing of many products. It has enabled
fresh ocean fish to be marketed all over the country. It
is being applied to fresh fruits and meats and enables
such products to be stored for many months.
Improved methods of transportation and production
lessen need for storage. — The transportation companies
are direct competitors of the storage warehouses. To il-
lustrate, potatoes are stored for use during the winter
and spring. Yet potatoes produced in southern terri-
tories are brought by the railroads and steamships to
northern markets during the winter, spring, and early
summer; hence the demand for stored potatoes is less-
ened during these seasons.
Improvements in methods of production also lessen
the need for storage. Earlier- and later-maturing vege-
tables are developed, while better feeding and care of
dairy herds increase the production of milk in the fall
and winter.
Where should goods be stored? — Goods may be stored
at the point of production, at the point of consumption,
or at an intermediate point through which they pass
during the marketing process. In order to keep con-
sumers supplied at all times, it is often necessary that
some reserve stocks be carried near the points of con-
Marketing Functions (Continued) 37
sumption. In the past, seasonally produced farm prod-
ucts have commonly been shipped soon after harvest,
and thus a heavy temporary burden has been placed
on the railroads. It has been suggested that these goods
should be stored for longer periods at the points of pro-
duction in order to equalize the burden of the railroads.
On the other hand, it has been contended that more coal
should be shipped in the summer and stored near the
consumers in order to equalize production and transpor-
tation.
Some of the factors to be considered in determining
the best place to store goods are:
1. The keeping of necessary reserve stock near the
consumers.
2. The equalization of the transportation burden on
the carriers.
3. The location of the best physical storage facilities.
Such facilities can often be more fully utilized if pro-
vided in large markets.
4. The place where money can be borrowed to best
advantage to carry the goods while in storage.
5. Transportation facilities. Goods are often stored
in terminals where they can be received and shipped
easily. Goods may be stored in ports where they have
to be transshipped from vessel to railroad or from rail-
road to vessel.
6. Freight rates. Other things 'being equal, goods
should be stored where the transportation costs of get-
ting them to the consumer will be least.
Freight rates. — Freight rates are generally lower on
carload than on less-than-carload shipments. For this
reason, goods should ordinarily be shipped the maximum
distance in carloads. This often means that they are
38 Marketing Functions (Continued)
shipped to points near the consumers in carloads. Here
they are unloaded and stored ready for shipment to the
retailers by truck or by rail in less-than-carloads. There
is need for considerable study in determining the proper
locations for storage houses. Transportation costs should
be held down, while storage costs should not be excessive.
The seller with stocks within easy reach of the retailers
has a strong selling advantage. At the same time, if he
carries stocks at an unreasonably large number of points,
storage costs will be high.
This saving in freight rates by storing at central dis-
tributing points is illustrated by the shipment of catsup
from New York to Rockford, Illinois. The retailer in
Rockford does not need a carload of catsup at one time.
If he has it shipped from New York in less-than-carloads,
the freight will be $1.59 per 100 pounds. The catsup,
however, can be shipped to Chicago in carloads (36,000
Ibs.) for 56% cents per 100 pounds. The less-than-
carload rate from Chicago to Rockford is 45 cents. Thus
the total cost of shipping in this way is $1.01% per 100
pounds. Here is a saving of 57% cents, while the cost of
storing in Chicago for one month is* 12.8 cents.
Who should store goods? — In the past, the whole-
saler was depended on to carry large stocks of goods. At
present, however, many wholesalers carry relatively
small stocks in order to reduce the cost and risks of stor-
age. Manufacturers have often assumed a large part of
the storage function. Improved transportation service
during recent years, however, has lessened the need for
carrying reserve stocks. Many manufacturers carry only
small stocks, producing goods only as rapidly as they are
sold or keeping only a little ahead of sales. This scheme
gives the consumer fresher goods and reduces the costs
and risk involved in storage.
Marketing Functions (Continued) 39
Seasonally produced farm products must be stored
until needed. The question often arises as to whether
the farmer should sell his products as soon as they are
harvested or whether he should store them for sale to-
ward the end of the season. In some years the prices are
much higher toward the end of the season than in the
fall, and profits are made by storing goods. In other
years the spring prices are lower than in the fall, and
losses result from storing goods. Several studies indicate
that, over a period of years, spring prices are about
enough above fall prices to cover the costs of storage —
interest, rent, handling, shrinkage, and deterioration.
The inference is that if a farmer is able to study all
supply and demand factors carefully, he can decide at
each harvest whether to sell his goods at once or store
for a rise in prices. If he is not capable of making such
forecasts, then he might just as well follow the practice
of selling as soon as the goods are harvested.
Storage facilities. — Storage facilities may be provided
by producers, middlemen, consumers, or warehousemen
who store goods for pay. Goods are stored in farmers'
granaries, manufacturers' storerooms, retailers' stores,
consumers' pantries, and public warehouses. It is very
important that adequate storage facilities be available
at all times: sufficient space in properly located houses,
proper protection against fire and theft, and proper tem-
peratures.
Public warehouses. — Public warehouses are operated
to store goods for the public for pay. There are six types
of public warehouses:
1. Merchandise, for the storage of general merchandise.
2. Household goods.
3. Cold storage, for the storing of goods that must be
kept cold.
40 Marketing Functions (Continued)
4. Special commodity, for storing particular types of
goods, as grain, tobacco, or cotton.
5. Bonded, where goods can be stored under bond.
This is necessary when the movement of goods is regu-
lated by the government, as is the case with imported
goods upon which the duty has not been paid.
6. Custodian or field. Goods are placed in the hands
of a public warehouseman but are stored on the pre-
mises of their owners. This procedure secures the
advantages of storing in a public warehouse without in-
curring the expense of moving the goods from the owner's
premises.
Services of public warehouses. — There are several ad-
vantages of storing goods in public warehouses. A nego-
tiable receipt may be obtained and used as collateral
for loans from banks or finance companies. The goods
cannot be removed and sold without the warehouse re-
ceipt, which is held by the creditor as collateral. The
warehouse receipt is secured by a certain quantity of
goods. While these are in the hands of the warehouse-
man, they cannot be levied upon by the creditors of their
owner. Borrowing on a warehouse receipt reduces the
amount of capital which is necessary to carry goods, or,
stated another way, the warehouse receipt enables one
to carry a larger quantity of goods than he could with
his own capital.
By storing in public warehouses, one need pay for
only the actual amount of space used. The amount of
space needed often varies widely from one time to an-
other. If a seller provides his own warehouses, much of
his space may be idle at certain seasons.
The better public warehouses are well constructed.
They are fireproof, equipped with automatic sprinklers,
and are under guard 24 hours a day. For these reasons,
Marketing Functions (Continued) 41
insurance rates on goods in such houses are often con-
siderably lower than for goods in more poorly constructed
and guarded private warehouses. The reduction in in-
surance rates is often a very worthwhile saving. In some
instances savings as high as 90 per cent are reported in
insurance rates, as between poor private warehouses and
good public warehouses.
The public warehouse is especially adapted to the
needs of a seller who wishes to carry regional stocks of
goods and who does not have enough goods at the various
storage points to justify maintaining his own warehouses
in charge of his own employees.
Public warehouses render other services for their pa-
trons. They will receive goods in carlots and ship them
out in less-than-carlots. They will pack or crate the
goods when necessary. They will issue invoices, and
ship goods on a C. 0. D. basis or draw drafts to accom-
pany shipments made on order bills of lading. Extra
charges are made for such services.
Liability of public warehouses. — Public warehousemen
are liable for goods only in case the goods are destroyed
or damaged because of their negligence. For this rea-
son, goods in public warehouses are usually insured. The
warehousemen must ordinarily return to the owner the
identical goods placed in storage. An exception is made
in the case of goods such as grain, which may be mixed
with other goods of the same grade. In this case the
warehouse must deliver only the same quantity of the
same grade of goods. Goods which may be mixed with
similar goods are known as fungible goods.
Charges of public warehouses. — The public warehouse
bases its charges on the space occupied by the goods, the
length of time they are kept in storage, and the cost of
moving them in and out of the warehouse. Extra charges
42 Marketing Functions (Continued)
are made for the labor in making shipments, packing
goods, making invoices, and so forth.
In addition to these charges, extra charges are made
for goods that require unusual care or that must be stored
under special conditions. These extra charges are known
as "modifications for cause." Examples are furnished by
silk, which has a very high value; by mirrors, which are
very fragile; by beans, which are attractive to vermin;
by onions and green hides, which are malodorous; and
by liquids, which are subject to leakage.
General merchandise warehouses generally make a
handling charge for moving goods in and out and a
monthly storage charge for the time the goods are left
in storage. Cold storage houses make a charge for the
first month high enough to cover the cost of handling the
goods. A lower charge is made for each additional month
the goods are left in storage.
Typical rates are:
COMMODITY MERCHANDISE HOUSES
Handling Charge Monthly Storage
In and Out Charge
Canned vegetables, per case (# 2 size) . 2^ 1 J4t
Flour, per barrel (200 pounds) 17^ W{
COLD STORAGE HOUSES
First Month's Each Additional
Charge Month's Charge
Eggs, per case (30 dozen) 10«f 5£
Butter, per 100 pounds 25<f 15f*
Government-licensed warehouses. — The Federal Gov-
ernment licenses warehouses to store certain stable farm
products such as grain, tobacco, cotton, wool, peanuts,
broomcorn, and dried fruits. The warehouses are oper-
ated in accordance with rules established by the Govern-
ment, and products stored in such houses are graded
Marketing Functions (Continued) 43
according to Government standards. The warehouse re-
ceipt covers a definite quantity of staple goods of known
grade, so the receipts issued by these warehouses are pre-
ferred collateral for loans. Banks will loan more on them
than on ordinary warehouse receipts and may make
loans at lower rates of interest. It is argued that the
Government should extend the use of licensed ware-
houses to staple manufactured goods.
Packing
Goods are packed for transportation and storage, so
that they can be handled and protected from damage or
loss. They may be wrapped, crated, or placed in bags,
bottles, barrels, or other containers. Liquids must be
placed in tight containers. Fragile goods must be packed
with special care or placed in special containers.
Standardizing
Standardizing is the fixing of specifications for quality.
Standards designate quality and may be based on weight,
physical structure, chemical content, size, sweetness,
ripeness, soundness, strength, or moisture content.
Standards facilitate the exchange of goods. When goods
are of known quality, they can be bought and sold by
grade, name, or description. Standards thus save the
labor of repeated inspections.
Standard goods have a more definite value than non-
standard goods and can be handled with less risk. Prices
are more accurately known. Banks will loan more on
the security of standard than of non-standard products.
With standardization there is less room for puffing, boast-
ing, or bragging by the sellers. Middlemen can handle
standard goods on narrower margins than they can non-
standard goods. Buyers can secure better values.
b4 iviarKeting Jt1 unctions (L/ontmueaj
Uniform standards. — A standard product should be of
t known quality no matter where it is produced or
)ought, For instance, No. 2 yellow corn, No. 3 soft win-
er wheat, fancy yellow cling canned peaches, and size 2
jx-std. canned peas should be of a known quality, re-
;ardless of who the producer is.2 This fact suggests the
leed for uniform standards which may be set up by cus-
om, by trade associations, or by government agencies.
Wastes caused by lack of standards. — Some argue that
I lack of standards leads to one of the largest wastes in
listribution, which runs into billions of dollars annu-
ity. According to this argument, small buyers, es-
>ecially the consumers, are consistently overcharged
>ecause of their ignorance of quality. Instances are cited
if relatively simple products that are sold by advertis-
ng and "high-pressure" methods to consumers for sev-
ral times their cost. The list of products includes
nedicines, insecticides, cleansers, foods, pens, clothing,
office supplies — in fact, practically all types of articles.
Thymol plus small quantities of boric and benzoic
acid under the name of Listerine sells for $1 a bottle,
while $495 worth of Listerine has the antiseptic
qualities of 1^ worth of corrosive sublimate or 33^
worth of carbolic acid. A disinfecting spray made
of formalin, perfume, and water sold for $62 a barrel.
When its composition became known it dropped to 47
2 Some have contended that standards are set up by producers of
dvertised brands. Campbell's soup is supposed to be the same rc-
ardless of whether it is bought in New York or China. In one
ense of the word, standards are established by advertising, as the
>uyers know what to expect whenever or wherever they buy an ad-
ertised brand. On the other hand, there is no assurance that Camp-
Bell's soup is of the same quality as Heinz soup or Hormcl soup. It
3 doubtful whether products sold under the manufacturers' brands
without uniform grade designations should be called "standards."
Marketing Functions (Continued) 45
cents. University purchasing agents found that they
were paying from 65^ to $6 a gallon for the same
quality of alcohol. A pooled order of 5 cars was
bought at 25^ a gallon. A floor varnish costing $1.70
a gallon was found as durable as one selling for $6.
The manufacturer of a moth killer paid %0^ a pint
for his raw materials and sold his product for $1 at
retail. — Chase, Stuart, and Schlink, F. J.: Your
Money's Worth, 1927.
Large corporations that purchase in large lots often
set up their own testing laboratories and buy at much
lower prices than are charged to buyers not so fortunately
situated. It is argued that huge sums could be saved if
definite standards were drawn up and all producers were
required to label their products with their proper grades.
It would then be possible for the consumers to determine
the grade which they wanted and to buy this grade from
the seller at the lowest price. Competition would be
placed on a price basis, and large expenditures for ad-
vertising and salesmanship would be greatly reduced.
Thus runs the argument, and there appears to be con-
siderable truth in it. Opportunities for large savings
are possible, even though all the savings claimed might
not be realized. All products cannot be standardized.
Some products are bought for their individuality. Pro-
ducers make goods of various styles, colors, and flavors,
and they would be likely to advertise their goods as hav-
ing better or distinctive qualities. It would take several
years and considerable expense to educate the great ma-
jority of the people to buy by grade.
Standardization should be encouraged, although all
of the advantages claimed by its advocates may not be
realized.
46 Marketing Functions (Continued)
Grading
Grading is closely associated with standardizing. The
two are often considered as two aspects of the same func-
tion. Standardizing is the setting up of rules or specifi-
cations. Grading is the application of these rules — the
physical work of inspecting, testing, or sorting goods in
accordance with the specifications.
Goods may be graded in two ways. First, they may
be inspected to determine their quality. The inspector
may look at the goods, feel of them, taste them, or take
samples for weighing, measuring, or chemical analysis.
As a result of the inspection, a definite grade is assigned.
The wheat may be No. 2; the potatoes, No. 1 ; the cotton,
strict good middling; the butter, 92 score; or the canned
goods, fancy.
Second, grading may involve the sorting or separating
of the goods according to quality. Apples may be sorted
so that only apples of one size will be placed in the
same basket.
Assembling
Assembling is the bringing together of similar goods
to obtain larger quantities for shipment or sale. The
country elevator brings together wheat in quantities large
enough so that it can be shipped in carloads. The cot-
ton merchant brings together enough cotton to be able
to supply the mills with large lots of uniform quality.
Assembling is important for goods produced in small
quantities, such as farm products.
Dividing
Dividing is the separating of goods into smaller lots
for sale; it is the converse of assembling. To illustrate,
Marketing Functions (Continued) 47
the wholesaler receives a carload of eggs, and since the
ordinary retailer cannot use a carload at one time, the
wholesaler divides the load and sells it to retailers by
the case. The ordinary consumer does not want a case
of eggs at one time; hence the retailer divides the case
and sells the eggs to consumers by the dozen.
Dividing should not be confused with grading. Goods
may be separated in grading; but this separation is done
on the basis of quality. In dividing, goods are sorted
not according to quality but merely to get them into the
smaller lots desired by the buyers.
Financing
All business concerns, in both marketing and produc-
tion, must be financed. Capital is needed to carry stocks
of goods, to extend credit to buyers, and to pay operating
expenses. Sound financing is very important to the suc-
cess of a business. The capital needed for carrying stocks
of goods will be considered later in connection with stock
turnover. Granting credit wisely and collecting accounts
closely will limit the amount of capital needed for ex-
tending credit to customers. Financing is not exclu-
sively a market function; it is generally studied as a
separate subject. Hence it will not be treated extensively
in this volume.
Risking
Risk is inherent in all business transactions. Distri-
bution involves many risks — risks from the ownership
of goods; liabilities for injury; risks from financial trans-
actions; risks on contracts; risks from death, accident,
sickness, and resignation of workers; and risks from the
weather. These risks may be grouped as follows:
48 Marketing Functions (Continued)
A. Ownership risks:
1. Drop in value of goods because of decline in
price;
2. Change of fashion, meaning goods must be sold
at a loss;
3. Fire — goods may be burned, or damaged by
smoke or water;
4. Theft — goods may be stolen or embezzled;
5. Storm — goods may be damaged by flood, tor-
nado, lightning, moisture, earthquake, hail;
6. Decay;
7. Vermin;
8. Heat or drouth;
9. Change in demand — goods become unsalable or
must be carried in stock for long periods because
of business depression, unemployment, strikes,
crop failures, local catastrophies •
10. Violence — damage by mob.
B. Financial risks:
1. Accounts and notes may become uncollectible;
2. Theft and embezzlement of money;
3. Bank failures may cause loss or cut off sources
of credit.
C. Liabilities for injury:
1. Trucks or salesmen's cars may injure persons
or damage property;
2. Customers may be injured OP premises;
3. Goods sold may be defective and injure the
buyers;
4. Employees may be injured while at work.
D. Liability on contracts:
1. Coupons or tickets have to be redeemed;
2. Cost of fulfilling future contracts may increase
as a result of an advance in wages or prices of
materials;
3. Default of others may involve loss on joint con-
tracts;
4. Guarantee of goods may involve loss on replace-
ment of repairs.
Marketing Functions (Continued) 49
E. Liability of loss of key men:
1. Important managers or skilled workers who have
had expensive training may die, become sick, be
injured, or resign.
F. Weather risks:
1. Sales may be lost because of bad weather.
Why risks are assumed. — Men are willing to assume
such risks in the hope of making a profit. The greater
the risk, the greater must be the anticipated profit, to
induce men to assume the risks. Risks are also taken un-
consciously by business men.
Shifting risk. — Many of the risks enumerated above
may be shifted to insurance companies. The business
men thus do not have to carry all of these risks them-
selves. Many insure against fire, tornado, theft, auto-
mobile accidents, and injuries to employees. Some carry
insurance against other hazards, such as embezzlement
by employees, rain, hail, and losses from bad debts. Cer-
tain risks, like changes in fashion and drops in prices,3
cannot be insured.
When risks can be shifted to insurance companies, the
cost of the premiums can be included in operating ex-
penses. Men are then willing to work for smaller profits.
Insurance companies can often base their rates on av-
erage losses, and such rates may be less than the antici-
pated earnings necessary to induce individuals to accept
the risks. A merchant might be ruined if his store burned
without insurance. The risk is so great that he feels he
cannot carry it himself, so he shifts this risk to an in-
surance company. He feels safer and does not need
3 In the case of some staple commodities, like wheat, corn, cotton,
silk, coffee, and rubber, which are bought and sold for future de-
livery on organized exchanges, the owner can largely shift the risk
of price declines by future sales. Such transactions are called
hedging. Hedging is discussed in Chapter 6.
50 Marketing Functions (Continued)
such a large profit to induce him to stay in business.
The margin of cost of marketing is thus reduced.
The insurance company must charge more than enough
to cover its risks. It has expenses for selling, overhead,
and adjustments. Such expenses may equal from 25
to 100 per cent of the losses paid, and one must there-
fore pay more for insurance than the cost of the risk in-
volved. For this reason, most business men prefer to
carry some risks themselves. Usually they carry the
risks which they feel are less likely to cause losses, and,
of course, they must also carry the risks that cannot be
insured.
Guarding against risks. — The business man can do
much to reduce the amount of risk. Fire damages are
lessened by fireproof buildings and automatic sprinklers.
Risk of theft is reduced by good locks and vigilant watch-
men. Losses from bad debts may be reduced by a careful
check on applicants for credit and an aggressive collection
department. Risk of changes in fashion may be limited by
careful fashion forecasting and the purchase of fashion
goods in small quantities. Loss from price declines may
be lessened by detailed market forecasting and a rapid
turnover of stock. Injuries to employees may be re-
duced by safety devices and the education of workers.
Risk increases marketing costs. — Risks account for a
part of the high cost of marketing. The importance of
risk may be easily seen when the dealer handles fashion
merchandise or perishable goods. Such goods may drop
in value, or become unsalable as a result of changes of
fashion or decay, which occur very quickly.
Recording
Accounting, or recording, is necessary in many trans-
actions: filling out sales slips, order blanks, stock rec-
Marketing Functions (Continued) 51
ords, invoices, bills of lading, and want slips; posting
customers' ledgers; recording expenses; and analyzing
expenses. Cost accounting has had a wide development
during the past 35 years. It began as a part of scien-
tific management and has contributed much to increased
business efficiency. It is just now being seriously ap-
plied to marketing activities.
The business man is often at a loss to know just how
full and complete records he should keep. Accounting
involves expense, but it gives facts upon which the busi-
ness man can base his operations. The present opinion
is that most business concerns have devoted too little
attention to accounting in the past. Records can be
used to reduce expenses and increase profits. Full rec-
ords are often needed. On the other hand, time should
not be spent in keeping records that are not used.
Management
All business enterprises must be managed or super-
vised. Policies must be formulated; plans made; em-
ployees hired, trained, and supervised. The manager
of a marketing enterprise must decide what types of
goods are to be bought, what price policies are to be fol-
lowed in selling, where the business is to be located, the
credit policy to be followed, and how competition is to
be met. Management is necessary in performing the
various marketing functions — in moving goods from pro-
ducers through the channels of trade to the ultimate con-
sumers.
Concentration and Dispersion
In the marketing process, goods are often brought to-
gether in large markets. From these markets they are
taken to consumers. The bringing together of the goods
52 Marketing Functions (Continued)
is concentration — a process made up of several functions.
It may include buying, transporting, storing, assembling,
financing, risking, and other functions. The process of
OR OTHER.
CQMMISSIONMEN
CENTRAL
MARKET
WHOLESALERS
WHOLESALERS
JOBBERS
AND
RETAILERS
RAILROAOS AND
CONSUMERS
Fig. 2. — Chart illustrating concentration and dispersion. This
represents the trade channel for farm products which reach the con-
sumers without being manufactured. Such products are concentrated
into central markets from which they are dispersed to the consumers.
taking goods from these large markets to the consumers
is dispersion, which may include several functions — di-
viding, selling, transporting, financing, risking, and
others.
Marketing Functions (Continued) 53
Chapter 3
Review Questions
1. Of what service is storage? What does it create?
2. How does storage even up the supply of seasonally
produced goods? Of seasonally consumed goods?
3. How does storage give protection against interruptions
in production? Against interruptions in transportation?
4. How is quick freezing affecting marketing?
5. How does storage affect price? Illustrate with the
price of butter.
6. How do warehouses and railroads compete?
7. How does improved production lessen the need for
storage?
8. What factors should be considered in determining
where goods should be stored?
9. What effect do freight rates have on the selection of
a place for storing goods?
10. Should the farmer sell his products at harvest or hold
for sale toward the end of the season?
11. What is a public warehouse?
12. What are the types of public warehouses?
13. What are the advantages of storing goods in public
warehouses?
14. What is the liability of a public warehouseman?
15. How do public warehouses charge for their services?
16. What are the advantages of storing goods in a
Government-licensed warehouse?
17. What is meant by packing? In what different ways
are goods packed?
18. What is grading? How does it differ from standard-
izing? How are goods graded?
54 Marketing Functions (Continued)
19. What is meant by assembling?
20. What is meant by dividing? Why is dividing neces-
sary?
21. What is the difference between dividing and grading?
22. What is meant by financing?
23. What is risk?
24. What risks are involved in marketing?
25. How can risks be reduced? Shifted?
26. What is meant by recording? How is it involved in
marketing?
27. What is management? What does it involve?
28. What is meant by concentration? By dispersion?
What does each involve?
Thought Problems
1. Do you believe that improved methods of transporta-
tion and production will make it unnecessary to store goods
for long periods?
2. It has been said that storage reduces the price re-
ceived by the farmer for his goods by increasing the supply
of goods on the market. Discuss this statement.
3. It has been said that storage increases the price to
consumers by increasing the demand at certain seasons owing
to the demand for goods to place in storage. Discuss.
4. As a manufacturer distributing goods nationally, how
would you go about determining at what points you should
carry stocks of goods for distribution to retailers?
5. What advantages would follow the establishment of
Government-licensed warehouses for manufactured goods?
It has been said that the Government is unfair in establishing
such warehouses for farm products and not for manufactured
products. Do you agree?
6. Does insurance reduce marketing costs? Would it be
desirable for the business man to shift all possible risks to
insurance companies? Why or why not?
Marketing Functions (Continued) 55
7. What is meant by cost accounting? What has it done
for manufacturing during the past years? Do you believe
that it can make any equally valuable contribution to mar-
keting?
8. Large-scale production is said to reduce production
costs. Large-scale production means the concentration of
production in a few large plants. These plants are located
at a distance from many consumers. These large companies
are said to have high distributing costs as a result of the
"high-pressure" selling necessary to sell enough goods to
keep their plants operating at capacity. Goods must be
transported for long distances. Distribution costs are s#id
to be increased. Do you agree? Granting for the mo-
ment that distribution costs are increased, are the consumers
injured by the increased costs? Why or why not?
CHAPTER 4
Middlemen, Trade Channels, and
Commodities
The middleman approach. — The study of middlemen
(or market institutions) shows what goods the middle-
men handle and what services (functions) they perform.
This approach is a practical method of studying market
distribution. It shows how these middlemen conduct
their operations and thus is helpful to men engaged in
marketing.
There are many types of middlemen: wholesalers,
jobbers, brokers, sales agents, commission merchants,
milk dealers, coal dealers, lumber yards, terminal eleva-
tors, filling station operators, garages, cotton buyers, to-
bacco and fruit auctions, grain elevators, live stock
shippers, farmers' cooperative associations, mail-order
houses, chain stores, department stores, general stores,
drug stores, hucksters, neighborhood stores, cigar stands,
ice cream parlors, restaurants, soda fountains, news
stands, florist shops, and so on. In order to study middle-
men, it is desirable that they be grouped or classified in
some way.
Kinds of middlemen. — Those individuals, partner-
ships, and corporations engaged in marketing are known
as middlemen. There are two principal kinds or classes
of middlemen : First, those who own the goods — that is,
have legal title to them. These middlemen are merchants
in that they buy and sell goods in an attempt to make a
56
Middlemen, Trade Channels, Commodities 57
profit. In addition to other marketing functions, they
assume the risks involved in the ownership of goods.
Second, those who are agents — who do not own the goods
but perform certain marketing functions for pay. These
are called functional middlemen for the reason that they
perform marketing functions without assuming the risks
of ownership.
Merchants. — There are many types of merchants. We
may group them broadly into three main groups : country
shippers, wholesalers, and retailers.
Country shippers. — The country shipper is en-
gaged in buying farm products, assembling them at
country points, and shipping them to central markets.
Country grain elevators and warehouses, live stock buy-
ers, specialized produce dealers, creameries and cream
stations, and cotton buyers are examples of country
shippers. These are discussed in Chapters 15-18.
Wholesalers. — Wholesalers are merchants who buy
goods and sell to other merchants and to manufacturers.
They operate between country shippers and manufac-
turers on one side, and retailers and industrial buyers on
the other side; they do not sell to the final consumers.
There are many types of wholesalers. Some have ware-
houses and others handle goods in railroad cars or public
warehouses. Some wholesalers have organizations of
traveling salesmen and make deliveries to the buyers;
others operate on the cash-carry basis. Some whole-
salers are privately owned and operated for profit; others
are owned by retailers. Some wholesalers handle full
lines of goods, and others handle only a few itenjs. Some
handle industrial equipment and sell to industrial buyers,
while others handle consumption goods and sell to re-
tail dealers. The operation of wholesalers is discussed
in Chapter 7.
58 Middlemen, Trade Channels, Commodities
Retailers. — The retailer is the middleman who
sells direct to the household consumer. He is the most
familiar type of middleman. There are many types of
retailers: chain stores, department stores, news stands,
mail-order houses, lunch rooms, restaurants, coal yards,
soda fountains, neighborhood stores, stores handling
shopping lines, and stores handling convenience goods.
Retail stores may be classified in many ways, but for
our purpose we shall classify them as individual or unit
stores, department stores, mail-order houses, chain stores,
wagon retailers, and bulk retailers.
Functional middlemen. — The functional middleman is
an agent who performs certain definite marketing func-
tions for pay without owning the goods — that is, without
having title to them. He works for definite pay and does
not buy and sell for profit. Such middlemen may be
grouped according to the functions performed. A par-
tial list follows:
Buying — purchasing agents, brokers, resident buyers.
Selling — brokers, sales agents, commission mer-
chants, selling houses, manufacturers7 agents,
auctioneers, advertising agencies, market counsel-
lors, and market research agencies. Few of these
agents perform all divisions of the selling function.
Transportation — railroads, trucking companies,
steamship companies; electric railways; air trans-
port companies; package delivery companies.
Storage — public warehousemen ; commission mer-
chants.
Grading — licensed inspectors, commission merchants,
testing laboratories, appraisers.
Dividing — commission merchants, public warehouse-
men.
.Financing — finance, credit, and discount companies;
banks; sales agents; collection agencies; factors or
commission merchants.
Middlemen, Trade Channels, Commodities 59
Risking — insurance companies.
Recording — public accountants, market research
agencies.
The operations of common carriers and public ware-
houses have already been discussed in describing the
transporting and storing functions. The operations of
brokers, sales agents, and commission merchants are de-
scribed in the next chapter.
Trade channels. — Goods ordinarily pass through the
hands of one or more middlemen between the producer
and the consumer. The trade channel is made up of the
middlemen who handle an article on its way to the con-
sumer. We may include in the trade channel only the
merchants who have title to the goods, or we may include,
in addition to these, all those who perform any mar-
keting function. If the latter course is followed, we
would include the physical movements of the good:: by
railroads, truckmen, warehousemen, and others; finan-
cing of goods by banks and finance companies; assuring
of risk by insurance companies; storing goods by ware-
house; and so on for all other marketing functions. This
would give longer and more complicated channels. We
are ordinarily more interested in following the ownership
of the goods rather than their physical movement, and
we shall therefore think of the trade channel as com-
posed of only those middlemen who buy and sell, re-
gardless of whether they are the owners of the goods
or whether they act as agents for the owners.
Manufactured goods. — We may follow the trade
channel of an article from the producer of the raw
material through the various middlemen and manu-
facturers to the consumer of the final product. This
often makes very long and complicated trade channels,
as many products go through several manufacturing
60 Middlemen, Trade Channels, Commodities
processes. Often a single raw material makes several
products, while, in other cases, it takes several raw
materials to make one finished product. For these
reasons it is simpler to consider that a trade channel
extends from the producer of an article to the consumer
of this article, whether the consumer be the manufac-
turer or the household consumer of the final product.
Thus the trade channel for wheat extends from the
farmer to the flour mill, while the trade channel for
flour extends from the flour mill to the baker, and the
channel for bread extends from the baker to the final
consumer. There is thus one trade channel for wheat,
another for flour, and a third for bread.
Trade channels illustrated. — The shortest possible
trade channel is found when the producer of goods sells
them to the .consumer — for example, when a farmer
sells his goods to the consumer. Goods, however, com-
monly pass through the hands of one, two, three, four,
or more middlemen.
Only one middleman may be included when the
farmer sells his eggs to the retailer or when the manu-
facturer sells his shoes to the shoe dealer. Manufac-
turers often sell to wholesalers who sell to retailers.
This trade channel involves two middlemen, the whole-
saler and the retailer. This channel is followed by
many manufactured products. The manufacturer,
however, often reaches the wholesaler through a bro-
ker, which involves three middlemen: broker, whole-
saler, and retailer.
Four middlemen are involved in the sale of many
farm products. These middlemen may be a country
shipper; a commission man or broker; a wholesaler or
jobber; and a retailer. Imported goods may pass
through the hands ,of the importer, broker, wholesaler,
Middlemen, Trade Channels, Commodities 61
and retailer, in addition to middlemen in the exporting
countries. Longer trade channels than these are not
unusual. Eggs, for example, may be handled by two
or three middlemen in the country and three or four
middlemen in the city markets.
Factors determining the trade channel. — Some of
the factors that determine the channel a product
follows are: distance between producer and consumer;
perishability of product; number of products sold by
the seller; scale of production, that is, whether the
goods are produced on a small or large scale; scale of
consumption; financial position and size of seller; and
the need for special facitities for handling the product.
The greater the distance between producer and con-
sumer, the longer the trade channel is likely to be. A
highly perishable product must be marketed quickly,
and may hence have a shorter trade channel than a
non-perishable product. Manufacturers of ice cream
and bread, for example, usually sell either to the re-
tailers or to the consumers. The manufacturer of a large
number of products is likely to carry the product nearer
to the consumer than is the manufacturer of a single
product.
Goods produced on a small scale, like farm products,
must be assembled. This often increases the length of
the trade channel. Large or well-financed sellers may
perform more of the marketing functions and carry the
goods further along the trade channel than smaller con-
cerns.
When goods need special facilities for handling, the
seller must either provide and operate these facilities
or sell through middlemen who provide them. Very
often these facilities are supplied by tJie manufacturer.
Gasoline must be stored in tanks and delivered to the
62 Middlemen, Trade Channels, Commodities
retailers in tank trucks. The oil refiners commonly
provide these facilities and perform the wholesale
functions. Fresh meat must be kept in cold storage ware-
houses; many of these are provided by meat packers,
who handle the meat until it reaches the retailers.
Sale in same stage of distribution. — Sales are often
made in the same stage of distribution, that is, between
similar middlemen who perform the same functions.
Such sales do not pass the goods on toward the con-
sumer and are frequently made for speculative pur-
poses. By this is meant that the buyers attempt to
make a profit out of a change in price and not by per-
forming a service. Such speculative sales are ordina-
rily condemned, although it is argued by some that
they tend to stabilize prices.
There are sales in the same stage of distribution that
do not involve speculation, as when one dealer over-
buys and another underbuys. To illustrate, we shall
assume that a wholesaler estimates that during a sea-
son he will sell 3,000 cases of peaches and buys this
quantity. His sales are less than expected, and toward
the end of the season he finds that he is overstocked.
He notifies a broker who finds another wholesaler who
needs the peaches and makes the sale. The peaches
are still in the same stage of distribution, and
no closer to the consumer than when they were in the
hands of the first wholesaler. Yet the sale resulted
from mis judgment and not speculation. If, on the
other hand, the wholesaler had bought more peaches
than he expected to sell to his customers because of an
expected advance in price, he would have been a specu-
lator on the extra peaches.
Integration. — Integration means the operation of
successive steps, or stages, in the production or mar-
Middlemen, Trade Channels, Commodities 63
keting of goods, by one concern. In regard to market-
ing, we think of an integrated concern as operating the
machinery for carrying the goods through two or more
stages of distribution.1 Thus the manufacturer who
sells to the retailers is integrated in that he performs
the wholesale functions in addition to the manufac-
Mine
Furnace
Mill
Factory
Mining
Cost
Mlg.
Cert
Mfg.
Cost
Mlg.
Cost
Operating
Exp.
Selling
Exp.
Mine Furnace Mill Factory Wholesale)
Houses
Retailer
Fig. 3. — The advantages of integration. Chart showing how tha
trade channel is simplified and how successive buying and selling
expenses are eliminated by integration. Above — trade channel
without integration; below — trade channel of a concern integrated
from the production of raw material to the retailer.
turing functions. The chain store is integrated in that
it operates both wholesale warehouses and retail
stores. Many manufacturers are integrated and op-
erate both factories and wholesale stores.
Integrated concerns have two important advan-
tages: First, they eliminate the cost of buying and selling
goods between the different parts of the organization.
Thus in an integrated industrial concern, the mine does
1 This is called vertical integration. Some call the consolidation of
similar concerns horizontal integration. Thus if several steel mills
combine, the consolidated company is said to be horizontally in-
tegrated. The consolidated concern may make some savings by re-
ducing the number of salesmen and the amount spent for advertising.
Such savings, however, are not always realized. These concerns may
attempt to control prices, for which reason they are often frowned
upon by consumers and the Government.
64 Middlemen, Trade Channels, Commodities
not have to sell to the furnace, the furnace does not
have to sell to the rolling mill, the rolling mill needs no
salesmen to sell to the foundry, and so on with succes-
sive manufacturing stages. Similarly, the chain store
needs no salesmen to sell to its retail stores, and the retail
store managers spend little time interviewing salesmen,
as they requisition most of their goods from their ware-
houses.
Second, risk is reduced as markets are more definitely
assured. This enables operations to be planned with
greater assurance and the plants to be operated more
evenly. Mines owned by an integrated concern know
that they have an- outlet for their products so long as the
factories operate. The wholesale houses of chain stores
buy with assurance, knowing that they have a definite
demand from their retail stores.
Limitations on integration. — In order to secure the full
advantage of integration, the various parts of a concern
must be coordinated. Suppose a department store oper-
ates a blanket factory. There is no cost in selling the
blankets to the department store. If, however, the store
is unable to sell all the blankets made by the mill, selling
expense is incurred in selling the remaining blankets.
Again, an integrated concern may be poorly managed
because of the variety of its operations. The hired man-
ager of the department store's blanket mill may be less
efficient than the owner of a similar mill whose organiza-
tion is devoted entirely to the operation of the mill.
The commodity approach. — In order to use the com-
modity approach, commodities must be classified. If
we should attempt to study each individual commodity,
such as coal, tobacco, canned vegetables, leather belting,
candy, wheat, hay, butter, patent medicines, nails, ice,
automobiles, radios, carpets, and so on, our study would
Middlemen, Trade Channels, Commodities 65
be almost endless. It would involve long descriptions and
much duplication of material. Many commodities are
handled by the same middlemen or go through the same
trade channel and involve similar functions.
Basis of classification. — Goods may be classified in ac-
cordance with their origin or the way they are produced ;
the way they are consumed; method of purchase; or
their physical characteristics.
As to origin, goods may be classified as farm products,
mineral products, forest products, fishery products,
partly manufactured products, and completely manufac-
tured products/
As to method of consumption, goods may be classified
as raw materials, partly finished materials, industrial
equipment, and consumers' goods.
With respect to method of purchase, goods may be
classified as to the elasticity of demand, the stability of
demand, the frequency of purchase, and the buying
habits of the consumers.
As regards physical characteristics, goods may be
classified as to bulkiness, concentration of value, perish-
ability, fragility, size, mechanical complexity, need for
mechanical service, and durability. A combination of
these methods seems best adapted to our purpose.
A classification of commodities. —
I. Farm products:
a. Grain
6. Livestock
c. Dairy products — milk, butter, cheese, etc.
d. Poultry and eggs
e. Cotton
/. Fruits and vegetables
II. Industrial goods:
a. Equipment (machinery)
b. Supplies
66 Middlemen, Trade Channels, Commodities
c. Raw and partly finished goods (aside from farm
products)
d. Fabricated parts
III. Consumption goods:
a. Convenience goods
1. Staple necessities
2. Impulse goods
b. Shopping goods
c. Wagon goods
d. Bulk goods
Farm products. — Farm products are produced on a
small scale by large numbers of farmers, and hence must
be concentrated. That is, large quantities must be
brought together to supply city markets or as raw ma-
terials for factories. Most farm products are industrial
goods as they come from the farm but become consumers'
goods after manufacture.
Industrial goods. — Industrial goods are goods used
for further production; they are not, therefore, sold to
the ultimate consumers. The buyers are factories,
mines, mills, and offices. Industrial goods include such
things as raw materials, partly manufactured goods,
machinery, fuel and lubricating oils used by factories,
typewriters, and other office equipment.
Consumers' goods. — Consumers' goods are bought by
the ultimate consumers, ordinarily in very small quan-
tities from a retailer.
Convenience goods. — Convenience goods are usually
staple products bought frequently, and of small unit
value. Convenience goods are so called because the con-
sumers generally buy them in convenient places without
spending time in shopping. Examples of convenience
goods are groceries, drugs, and newspapers. Some con-
venience goods, such as candy, soda water, and novelties,
are bought largely on impulse.
Middlemen, Trade Channels, Commodities 67
Convenience goods should be handled by stores located
where they are easily accessible to the buyers. This
may mean neighborhood locations in the residential
districts for groceries, on a busy down-town corner for
tobacco and newspapers, or near the business offices for
lunchrooms. The person buying convenience goods
usually knows what he wants before he enters the store.
Shopping goods. — Shopping goods usually have a rela-
tively large value^and are bought at infrequent intervals.
The consumers attach so much importance to shopping
goods that they are willing to devote considerable time
to their purchase. This often means that the consumers
visit many stores and compare the goods and prices of
different sellers. This may be done to secure goods
adapted to the needs of the buyers, or to secure the best
prices. Suits, coats, dresses, furniture, rugs, jewelry,
automobiles, women's shoes, and millinery are examples
of shopping goods.
Shopping goods are generally sold by stores located in
the shopping districts and near other stores handling
similar goods. The buyers like to shop where there are
several stores so that they can compare goods and prices.
Shopping stores need large assortments of goods to en-
able the buyers to make selections.
Wagon goods. — Some perishable goods are consumed
regularly by the consumers. Such goods are often sold
from wagons. Milk, ice, bakery products, fruits, and veg-
etables are examples.
Bulk goods. — Some goods are too bulky to be handled
by the ordinary type of retail store. The dealers in
these commodities are often located on railroad sidings
so that the goods can be unloaded directly from the cars
into their yards, buildings, or trucks. Coal, lumber, feed,
sand, stone, cement, and fuel oil furnish examples.
68 Middlemen, Trade Channels, Commodities
Such goods are often sold by telephone or by salesmen
who visit the buyers. Although classed as consumption
goods in our outline, bulk goods are sold to both con-
sumers and industrial buyers.
Organization of material. — We shall consider the oper-
ation of various types of middlemen in the following
chapters. More attention will be given to middlemen
engaged in the distribution of consumer goods than to
those who handle industrial goods. Hoyvever, many deal-
ers handle both classes of goods. The student should
keep the classification of commodities constantly in mind
while considering the operations of the various middle-
men.
Following the chapters on middlemen, we shall discuss
the distribution of industrial goods and farm products.
The distribution of these commodities differs in many
important respects from the marketing of consumers7
goods.
Chapter 4
Review Questions
1. What is meant by the middleman approach to the
study of marketing?
2. Name different types of merchants.
3. Define functional middlemen.
4. What are country shippers? What functions do they
perform?
5. Name types of wholesalers and retailers.
6. Name different types of functional middlemen.
7. What is meant by a trade channel?
8. What factors determine the trade channel followed by
different products?
Middlemen, Trade Channels, Commodities 69
9. Should we attempt to make one trade channel include
the marketing of products all the way from the producer of
the raw material to the consumer of the finished product?
10. What is meant by a stage of distribution?
11. Give illustrations of trade channels involving one, two,
three, and four middlemen.
12. Why are goods sold in the same stage of distribution?
13. What is meant by integration?
14. What are the advantages of integration? How may
it reduce marketing costs?
15. What are the limitations on integration?
16. Distinguish vertical and horizontal integration.
17. What is meant by the commodity approach to the study
of marketing?
18. In what ways may goods be classified for study? Give
a classification.
19. What are the characteristics of farm products?
20. What are industrial goods? Who are the buyers?
21. What are consumers' goods?
22. What are convenience goods?
23. What types of stores handle convenience goods?
24. What are shopping goods?
25. What type of stores handle shopping goods?
26. What are wagon goods?
27. What are bulk goods?
Thought Problems
1. What are the advantages and disadvantages of the
commodity approach to the study of marketing?
2. What are the advantages and disadvantages of the
middleman or institutional approach to marketing?
70 Middlemen, Trade Channels, Commodities
3. What types of goods are the following: locomotives;
ice; men's work shoes; women's dress shoes; overalls; filing
cabinets; washing machines; coal bought by a factory; coal
bought by an individual consumer ; pig iron ; iron ore ; cotton ;
corn for manufacture into cornstarch; sugar for manufacture
into candy; silk hosiery; men's suits; women's silk dresses;
typewriters; cigarettes; milk; butter?
4. A wholesale dry goods house operates mills producing
cotton cloth, towels, sheets, sweaters, blankets, cotton and
rayon hosiery, and house dresses. It normally sells to re-
tailers the entire output of the plants making towels, sheets,
hosiery, and house dresses. A considerable portion of the
outputs of the other plants must, however, be sold to other
wholesalers, chain stores, and other large buyers.
(a) Is this concern integrated? Is marketing cost reduced
by the ownership of the factories? Do you believe that this
wholesale house can operate these various factories as
efficiently as they could be operated by independent com-
panies?
(6) This wholesale house decides to open a chain of retail
stores. The chain can be supplied very largely from the
wholesale house and will help to utilize the outputs of all
the factories. Will the establishment of this chain of stores
enable goods to be marketed more cheaply than when the
wholesaler sold to independent retailers? Will the consumer
be benefited?
5. Why are functional middlemen used in the marketing
of goods?
6. A wholesaler estimates that he will sell, during the
following winter, 4,000 cases of eggs. He buys 5,000 cases
and places them in cold storage. He sells only 3,000 cases to
his regular trade. He therefore has a broker sell the other
2,000 cases to another wholesaler. Was this wholesaler a
speculator?
7. The National Biscuit Company manufactures a line
of cookies, crackers, and other bakery products. It main-
tains a large number of distributing houses from which it
operates trucks to supply its goods direct to the retail stores.
Middlemen, Trade Channels, Commodities 71
What factors cause the National Biscuit Company to use
this method of distributing its products?
8. Maryland tomato canners often employ sales agents
who sell their entire outputs. Why is this sales method
employed?
9. The large meat packers commonly operate branch
houses from which they sell their meats to the retail butchers.
Why?
CHAPTEK 5
Brokers and Other Agents
The agent. — An agent is one who acts for another.
The owner of goods may sell them himself, may hire a
salesman to sell them, or may have them sold by au
agent called a broker.
The broker. — A broker is an agent whose regular busi-
ness is to negotiate sales or purchase contracts between
buyers and sellers without having title to the goods. He
is an independent salesman who specializes in selling or
buying for others. He is an agent (functional middle-
man) who performs the selling (or buying) function
without owning the goods. He does not ordinarily have
possession of the goods. His task is to make contracts
between buyers and sellers as to price and other terms
of sale. He usually operates in only one trade and deals
in relatively few commodities, which are often raw ma-
terials or staple consumers' goods. His commission is
ordinarily earned when the contract is made, whether
or not the goods are later delivered. The broker is often
thought of as a free lance agent who sells (or buys) for
anyone who has goods for sale.
The sales agent. — The sales agent is a broker who usu-
ally sells the entire output of the producers whom he
represents and with whom he maintains continuous re-
lations. He may sell only certain of the lines produced
by his principals (manufacturers or other producers)
or may represent them only in a limited territory. A
72
Brokers and Other Agents 73
sales agent is usually much closer to his employers than
is the broker. He may finance them and may have full
authority in naming the selling price of their goods. He
usually receives a higher rate of commission than the
broker and so has a greater interest in their success.
Buying. — Buyers situated outside the large markets
often employ buying brokers in these markets to make
day-to-day purchases between their own visits to the
markets. In some trades, goods are made by small
specialty producers. For example, the hardware whole-
saler often handles goods made by 1,000 or more pro-
ducers. Many of these producers are too small to keep in
constant touch with the wholesalers. The hardware
wholesalers therefore often employ purchasing agents to
make purchases and to give information regarding prices
and sources of supply.
Resident buyers. — Resident buyers are purchasing
agents in central markets who represent out-of-town de-
partment and apparel stores. They purchase goods,
especially apparel, for the stores between the visits of
their buyers; find goods for the buyers' inspection;
notify them of bargains ; and otherwise represent the in-
terests of the stores. Most of them are paid commissions
or monthly fees by the stores they represent, but some
receive their commissions from the sellers.
Commission merchants. — The commission merchant is
an agent who receives goods for sale on a consignment
basis. He has the goods in his possession, sells them,
and accounts to the owner for the proceeds of the sale.
The distinction between the broker and the commission
merchant is that the commission merchant has posses-
sion of the goods. The commission merchant stores, de-
livers, and often divides the goods; transfers title;
collects payment and deducts his commission and ex-
74 Brokers and Other Agents
penses, such as freight; and remits the balance to the
shipper together with an "account sales" of the trans-
action. The distinction is clear, but it is not observed
in the language of all trades. In the grain trade,, for ex-
ample, grain is consigned to so-called "brokers" who are
in fact commission merchants.1
Manufacturers' agents. — Manufacturers' agents, as
defined by the Census Bureau, are a type of broker who
maintains continuous relations with the manufacturers
whom he represents and sells their products in specified
territories at prices named by them. They occupy a
position between the free lance broker and the sales
agent.
Types of brokers. — Brokers sell (or buy) merchandise,
stocks and bonds, real estate, and insurance. Brokers
selling goods are called merchandise brokers to dis-
tinguish them from brokers selling securities, insurance,
and real estate. Our discussion in this chapter will be
limited to merchandise brokers. Brokers sell nearly all
kinds of merchandise. They are found selling sugar,
chemicals, canned foods, dried fruits, cream, fertilizers,
textiles, confectionery, groceries, automobile accessories,
mill supplies, fresh fruits and vegetables, grains, cotton,
and so on.
1 The fact that legal definitions are not followed in all trades should
not cause us to lose sight of distinctions. A man may engage in
different types of operations. He may buy and sell for himself; may
receive goods on consignment; and may represent some sellers as
brokers and others as sales agents. He may be called a "broker" or
some other title. Regardless of the name, we should not fail to
distinguish his different methods of operation. Confusion also comes
from the fact that a man often changes his method of operation.
When he changes his method, the old name may stick to him. To
illustrate, fruits and vegetables were formerly shipped to a very
large extent on consignment to commission merchants. Many of the
dealers now do little or no commission business and yet they are still
called "commission merchants."
Brokers and Other Agents
75
Volume of brokerage business. — The importance of
various types of selling agents is shown by the Census
figures in Table 2. The average operating expenses of
the various agents are also shown.
TABLE 2.— BUSINESS OF SELLING AGENTS IN 1929 AND 1933
- 19J9
1938
.
Num-
Kales Expenses
Num-
Sales Expenses
Type of Agent
ber
(mil-
%«/
ber
(mil-
%of
lions)
Sales
lions)
Sales
Brokers.
3,689
$ 4,038
1.3
3,414
$2,OS8
1.7
Commission merchants
3,479
4,095
2.3
3,128
2,225
3.2
Sales agents
3,200
2,623
4.8
1,235
988
4.2
Mfrs' agents
6,987
1,775
6.8
4,972
574
6.8
Export agents
260
399
4.4
240
135
4.2
Import agents
85
57
9.2
179
51
6.4
Other agents
028
670
050
4il
2.7
Totals and averages
18,388
$14,257
3.2
13,818
$6,502
3.2
It will bo noted that the depression of the early thirties
was hard on the business of selling agents, their number
declining 25 per cent and their sales 54 per cent. Export
agents, manufacturers' agents, and sales agents were
especially hard hit. The number of import agents, how-
ever, increased during this four-year period. A great part
of the decline in sales, was, of course, due to a decline
in prices. This was especially true of commission mer-
chants, whose business probably declined very little in
actual quantity of goods handled.
The average expenses of the various types of selling
agents for the years 1929 and 1933 are shown in Table 2.
The expense figure excludes the salaries of proprietors
and partners. In the case of small unincorporated con-
cerns, such salaries take a very considerable portion of
the agents' commissions and in fact constitute one of
their largest expenses.
Paid for their services. — Brokers are ordinarily paid
commissions on the goods bought or sold. The commis-
76 Brokers and Other Agents
sion may be a percentage of value or a definite amount
for each unit of produce. Commissions vary with the
size of sales customarily made, with the services ren-
dered, and with the volume of business furnished by in-
dividual employers (principals). Higher commissions
are charged in trades where sales are commonly made
in small quantities than in trades where sales are made
in larger lots. Higher rates are often charged when
brokers help to finance their principals than when no
financial assistance is rendered. A large seller, by giving
all of his business in a territory to one broker, may se-
cure a lower rate of commission.
Commissions range from a fraction of 1 per cent up to
5 per cent or more, sales agents often receiving higher
rates of commission than brokers. In the sale of canned
foods, for example, brokers are frequently paid 2 per
cent, while sales agents often receive 5 per cent. The
broker may receive so much per car, per bushel, per
dozen, or per pound. The rate on potatoes may be $10
a car, while the rate on eggs may be % to %>$ per dozen.
On the sale of grain, rates may be from 15 to 25 cents
per 1,000 bushels.
Commission merchants perform more services than
brokers and therefore ordinarily receive higher rates of
commission. Rates of 5 to 10 per cent are common. On
the sale of consigned grain in Chicago, the commission
merchants ("brokers") receive 1 per cent with l1/^ per
bushel as a minimum on wheat and 1^ on corn.
Functions performed by brokers. — The broker per-
forms primarily a selling (or buying) function. He finds
buyers, negotiates price, and gives advice. He ordi-
narily does little to create demand.
In addition to selling, the broker sometimes helps to
Brokers and Other Agents 77
finance his employer (principal). He may endorse his
employer's notes, may loan him money, may guarantee
accounts for goods sold, or may advance money against
goods. The sales agent, however, more often finances
his employer than does the ordinary broker.
At times the broker handles goods. The seller may
have orders for only a part of a car and yet may ship
an entire car to secure the lower freight rate. The
broker tries to sell the rest of the goods while they are
in transit, and, if he cannot do this, he must care for the
goods until they are sold. The broker often receives
pooled cars, has the cars opened, and has the goods
delivered to the buyers.
The broker may collect accounts and represent the
seller in disputes with buyers. Most of these are extra
services, not included in a regular brokerage business.
They are performed in order to secure satisfied princi-
pals.
Place of brokers in trade channel. — The broker usu-
ally represent manufacturers, mines, mills, importers, or
country shippers, such as farmers' cooperative associa-
tions. He usually sells to manufacturers, wholesalers,
jobbers, chain stores, department stores, large specialty
stores, exporters, mine operators, public utilities, con-
tractors, or other large buyers.
Operation of brokers. — The broker is a specialized,
independent salesman. He is specialized in that he sells
only one product or a few closely allied products. He
often 'operates in highly specialized lines that are little
known to the average consumer. The selling broker is
a salesman, and his main function is to sell. His chief
assets are his sales ability, his relations with buyers and
sellers, and his knowledge of market conditions. Brokers
78 Brokers and Other Agents
often operate as individuals, maintaining small offices,
renting desk space, or handling the necessary correspond-
ence from their homes.
Other brokers are organized as partnerships and cor-
porations. Some of the large brokerage concerns have
suites of offices, forces of salesmen, stenographers, and
clerks. A broker usually operates in only one city, al-
though he may effect sales in other cities through other
brokers. The sales agent, for example, may receive a 5
per cent commission and pay 2 per cent of it to the
brokers who make sales in various cities.
The concern doing a strictly brokerage business needs
little capital. It has only to pay operating expenses
until sales are made and commissions collected. How-
ever, if his employers are financed, considerable capital
may be needed.
Earnings of brokers. — Since a broker is paid a com-
mission on his sales, if his sales are large, his earnings
will be large. If he makes few sales, he will have small
earnings. Successful brokers often receive handsome in-
comes, but unsuccessful brokers may earn so little that
they leave the business or devote only a part of their
time to it.
Advantages of brokers' selling function, — Brokers are
employed to make sales because the seller is too small
to maintain a satisfactory sales organization, because
the brokers have valuable contacts with buyers, or be-
cause it is cheaper to sell through brokers than to main-
tain a sales organization.
Service to small producers. — Many small manufac-
turers employ brokers, because they have limited capital,
because they have limited sales, or because they know
little about selling. Their volume of business is too
small to justify a complete sales organization, and very
Brokers and Other Agents 79
often the operation of their plants requires all of their
capital, time, and energy. Many good production men
are poor salesmen. It is logical for concerns in the hands
of such men to employ sales agents who may take over
the entire marketing of their goods. When such pro-
ducers become larger, they often employ brokers and
exercise a general supervision over selling activities.
When they become still larger, they often establish their
own sales organizations and do without brokers.
A cannery, for example, is often owned by a man who
knows little about marketing. His time is occupied with
the operation of the cannery, and the most practicable
way for him to sell his canned goods is to employ a sales
agent or a broker to dispose of them.
A cotton mill may be started in a small town by local
capital. The company hires as manager an experienced
mill man whose time is fully occupied in managing the
mill. Besides the fact that he is fully occupied, he
probably knows little about marketing. The logical way
to sell the output of the mill is through sales agents or
brokers. They are in the market continually. If the
manufacturer depends entirely on traveling salesmen,
he is likely to lose some sales because his salesmen are
not always on hand when the purchasers are ready to
buy.
Advice. — The advice given by brokers is often very
valuable to their principals. In fact, some concerns
employ brokers primarily for their information and ad-
vice. These brokers often study supply and demand
factors carefully and are in daily and hourly touch with
prices. This enables them to predict future price mpve-
ments with some assurance — information that is often
valuable to business men. They know the actual prices
at which goods can be bought or sold, whereas it is
80 Brokers and Other Agents
sometimes hard for one not in constant touch with the
market to secure this information. Published prices are
not always the actual prices at which goods are being
sold.
Cost of brokers. — It may be cheaper to sell through
brokers than to maintain a sales organization. To illus-
trate, a manufacturer may sell $10,000 a month in a
certain territory. He pays his broker 2 per cent, or
$200, a month for securing this business. It would cost
the manufacturer $400 or $500 a month to keep a
salesman of the necessary ability in this territory. It
would cost something like $1,000 a month to open a
branch sales office in charge of a competent manager.
If the manufacturer places his own salesman in the
territory and he does not increase sales, selling expense
will be 4 or 5 per cent; while if he maintains a branch
sales office, his selling expense will be 10 per cent. If
this manufacturer decides to substitute his own salesman
for the broker, this salesman will have to more than
double the volume of sales to hold his selling expense
down to 2 per cent. If he opens a branch office, he will
have to secure five times as much business to hold his
selling cost down to 2 per cent.
Disadvantages of brokers. — One reason why brokers
are not more widely used is that they do not sell enough
goods to satisfy their principals. Brokers are accused
of loafing on the job. It is said that they go after only
the big orders, that they take only the business that
comes to them; in short, that they do not work the
market thoroughly. The manufacturer referred to above
may feel that the territory should yield much more than
$10,000 business a month. He may place his own sales-
men in the territory to increase sales even if the per-
centage of selling cost is increased.
Brokers and Other Agents 81
On his side, the broker says that he can devote to an
account only the amount of time that the sales justify.
If the manufacturer wants more effort put behind his
goods, he should pay the broker more. The manu-
facturer replies that if the broker would work harder,
he would make larger sales and thus earn larger com-
missions. The manufacturer cannot, however, expect
the broker to do a lot of promotional and missionary
work for 2 or 3 per cent.
The brokers are also accused of selling purely on a
price basis. It is said that the only sales argument they
know is a low price: that they know little about selling
on a basis of quality.
Social value of brokers. — The broker is useful in sell-
ing for small producers. He operates on a relatively
small margin. He has relatively low expenses, owing to
the large average size of his sales and the fact that he
does not handle the goods. The consumer, therefore,
is benefited when the broker displaces middlemen with
higher operating expenses.
The brokers may be criticised for encouraging specu-
lation. Some brokers induce people to speculate in order
to earn commissions on the transactions. Almost any
commodity can be used for speculation — grain, potatoes,
onions, eggs, or real estate. Brokers may urge people to
purchase such commodities in the belief that prices will
advance. Many argue that such speculation is opposed
to the public interest. Brokers not only encourage others
to speculate but often speculate themselves by buying
goods. Those who follow this practice regularly are
called merchandising brokers.
The broker may divide the goods and pass them on
toward the consumer in smaller lots. If he does this,
he is performing the functions of a wholesaler. Many
82 Brokers and Other Agents
of his merchandising transactions are, however, purely
speculative and hence of very doubtful value. Census
figures show that about 12 per cent of the sales of brokers
consisted of goods handled on a merchandising basis.
We commend the broker for his regular or legitimate
selling (or buying) activities, but condemn his specula-
tive activities.
Commission merchants. — Commission merchants are
important in the sale of many commodities. Most of
the livestock is consigned to commission men located at
the stockyards in central markets. Approximately 70
per cent of the grain reaching central markets is sold
on a commission basis. Butter, fruits, and vegetables
are often sold by commission merchants. Many manu-
factured products, such, for example, as Mazda light
bulbs, are sold on a consignment basis. Some manu-
facturers sell on a commission basis in order to control
resale prices or to induce the merchants to carry ade-
quate stocks of goods.
Commission merchants, however, are said to do less
business than formerly. Many wholesale buyers have
established buying facilities at country points, so that
the farmers or country shipper of farm products do not
have to consign their products to a commission merchant
in a central market. Many farmers' cooperative organi-
zations have established selling organizations in the cen-
tral markets.
At times there has been much dissatisfaction with
commission merchants, because of the low prices received
on sales made by them. Many shippers consign only
when local prices are unsatisfactory. If the farmer or
country shipper is offered a satisfactory price at the
country point, he will be likely to sell there. If, however,
the local price is low, he may consign his goods to a
Brokers and Other Agents 83
commission merchant, hoping for a better price. The
price is probably low because the market is oversupplied.
Unless the oversupply disappears while the goods are
in transit, the commission merchant is very likely to
have to sell at a low price. The shippers are naturally
dissatisfied and blame the commission men.
The commission men have also been accused of dis-
honest and unfair practices. They have been accused
of making false returns to shippers; of buying the goods
themselves at low prices and then reselling for a profit;
and of selling their own goods and allowing consigned
goods to spoil. There have undoubtedly been dishonest
commission men, but the commission merchants say that
the percentage of dishonest men is no higher among
commission merchants than among other groups.
The Federal government and some of the states have
provided for their regulation. Those handling perishable
agricultural products in interstate commerce are licensed
by the Federal government, and their operations are
subject to inspection by public officials.
Chapter 5
Review Questions
1. Define an agent; a broker. What are the different
types?
2. Define a sales agent; a resident buyer.
3. Define a commission merchant.
4. How are brokers paid for their services? Why do the
rates of commission vary?
5. What is meant by saying that the broker is a func-
tional middleman? What functions do brokers perform?
6. What place does the broker occupy in the trade chan-
nel? How are brokerage concerns organized?
84 Brokers and Other Agents
7. How are a broker's earnings determined?
8. Why are brokers used? Are brokers more likely to be
employed by small or large manufacturers? Why?
9. Why is it that a manufacturer can at times sell with
less expense through a broker than through his own salesmen?
10. What kind of advice does a broker give? Why is this
valuable to the principal?
11. Why are buying brokers employed?
12. Why is it that a broker sometimes finances his princi-
pals?
13. What are the disadvantages of selling through brokers?
14. What can you say of the value of brokers from a public,
or social, viewpoint?
15. In what trades are commission merchants important?
Why has the business of commission merchants declined?
16. Why have the shippers at times been dissatisfied with
commission merchants?
17. Under what conditions is the sale of goods through
commission merchants likely to be satisfactory?
Thought Problems
1. What traits of character or qualities are necessary for
success in the brokerage business?
2. How can a young man become a broker?
3. Why is it that manufacturers often employ sales agents
when they are small and then discharge these agents and
establish their own sales organizations when they become
large?
4. It has been said that the brokers cannot create demand
— that they are best suited for selling staple products to large
buyers on a price basis. On their side, the brokers say that
they can create a demand if they are paid for doing it. They
point out that little promotion work can be done for 1, 2, or
even 5 per cent. If the manufacturer advertises his product
Brokers and Other Agents 85
and employs missionary men, his expenses will be much
above 5 per cent.
The broker also says that if he expends a lot of energy on
a brand and builds up a big demand for it, the manufacturer
may take its sale away from him and not allow him to profit
from his efforts.
Comment on these statements. Under what conditions
would you employ a broker to create demand for goods sold
under your brand?
5. Can a manufacturer sell more cheaply through his own
salesmen or through a broker? Discuss.
6. If brokers sell at less expense than manufacturers'
salesmen, should their operations be encouraged?
CHAPTER 6
Auctions, Exchanges, and Speculation
Auctions
Two kinds of sales. — Sales may be made in two ways :
privately between buyer and seller; and publicly, the
goods being sold to the highest bidder. Public sale in-
volves more formality than private sale. The seller is
supposed to announce the rules of the sale in advance
and then to sell to the highest bidder who conforms to
the rules, unless the rules allow the goods to be with-
drawn or bids to be refused.
Most of us are familiar with some type of auction
sale. In the rural districts there are frequent auctions
of livestock, household goods, and farm equipment. In
the cities there are auctions of real estate, used furni-
ture, art goods, and antiques.
Characteristics of public sales. — Public sales are open
to the public. Anyone is free to come arid bid. The
goods must be sold to the highest bidder, unless the
seller reserves the right to reject bids. A common rule
is that a sale must be made if two bids are received.
Goods sold at auction are usually sold "as is" — that is,
the buyer takes the goods just as they are and the seller
does not guarantee them in any way. Goods that are not
standardized, and goods without known values, such as
rare books and paintings, may be sold at auction. On
the other hand, some argue that since goods are not
86
Auctions, Exchanges, and Speculation 87
guaranteed, more buyers will be attracted and higher
prices will be received when standardized goods are sold.
As the goods are not guaranteed, the buyer should be
given a full opportunity to examine them. If this oppor-
tunity is denied, the buyer may well be suspicious of the
sale.
The auction sale brings into play an element of crowd
psychology that is lacking in private sales. People in
a crowd do not always think clearly, nor do they like to
be outdone in public. Thus if two or more bidders start
bidding for an article, they may bid more than it is
worth. On another article the bidding may be listless,
and the article may be sold for less than its value. Prices
received at auction may vary widely. The hope of get-
ting bargains is one of the main factors attracting people
to auctions.
The law of supply and demand is said to work more
freely in public than in private sales. The supply is
known and the price realized depends upon the bidding
of the buyers. The auction seller says something like
this: "Here are the goods. Take them for what you
think they are worth."
To be successful, auctions must be well attended by
buyers and must have their confidence.
Functions of public sales. — The auction performs pri-
marily a selling function. It finds buyers, negotiates
price, and transfers title. Other functions that may be
involved are dividing, storing, financing, assembling, and
transporting. Auction sales at times establish market
prices which are followed at private sales.
Importance of auctions. — The auction is an old
method of selling. It has apparently declined somewhat
in relative importance, but is still of much greater im-
portance than is realized by some people. Real estate;
88 Auctions, Exchanges, and Speculation
livestock; antiques, rare manuscripts, pictures, and
books; furs; used furniture and rugs; salvaged stocks;
used farni machinery; tobacco; eggs; and fresh fruits
and vegetables are often sold at auction. The Census
reported 404 wholesale auction companies in the United
States in 1929, with sales of $352,324,000, which was an
average of $872,000 per auction. Fruits, vegetables, and
tobacco make up a large part of the goods sold at auction.
Furs are another important product sold at auction. The
world's wool market centers in the wool auctions held
in London and other cities.
Types of auctions. — Since auctions are open to the
public, they cannot technically be divided into whole-
sale and retail sales. Practically, however, wholesale
auctions are established by fixing the minimum amounts
of goods that can be bought so large that only dealers
can buy. Auctions may be classified into those held
regularly, as every day, every week, every month, or at
definite times during the year; and those held irregularly.
Irregular sales may be announced to sell bankrupt stocks,
livestock, salvaged goods, real estate, or used goods.
We are particularly interested in wholesale auctions,
which are held regularly and so become an established
part of our marketing system. The fruit auctions are
perhaps the largest and best known of the regularly
established wholesale auctions.
The fruit auctions. — These auctions sell both fruits
and vegetables but are especially important in the sale
of oranges, grapes, lemons, boxed apples, grapefruit,
and bananas. Approximately one-third of all the fruit
shipped by rail is sold at auction.
Fruit is auctioned off in carlots and in less-than-
carlots. With the exception of California grapes, most
of it is sold in less-than-carlots at auctions located in
Auctions, Exchanges, and Speculation 89
12 or 15 of our large cities. In these less-than-carlot
auctions, the fruit is unloaded from the cars and stacked
in rows in warehouses. The lids are removed from top
boxes for inspection. After inspecting the fruit, the
buyers go to the auction rooms where the sales are held.
Courtesy Pennsylvania, Railroad.
Fig. 4. — Fruit unloaded from the cars and awaiting inspection
of the buyers prior to its sale at auction. Note that the lids are
removed from one-half of the lugs (boxes) of grapes in the top rows
to allow inspection.
Catalogs are printed, arranged by carlots. Each carlot
is divided into lots, or lines, and the fruit is sold by lines.
All the fruit in one car is sold before a second car is
offered. Sales are made with such rapidity that a score
or so of cars may be sold in an auction lasting for perhaps
a couple of hours.
Position in trade channel. — The fruit auction sells fruit
for cooperative associations, auction receivers who rep-
90 Auctions, Exchanges, and Speculation
resent country shippers, wholesalers, and commission
merchants. Sales are made to jobbers; chain stores;
brokers representing retailers, institutions, and others;
wholesale grocers; hucksters; and others who buy in
large enough quantities to justify spending the time
necessary to attend the auction.
Courtesy U. S. Dept. Agriculture.
Fig. 5.— Interior of a fruit auction. Note the clerks on both sides
of the auctioneer to record the sales, and note the platform in front
of the auctioneer on which goods may be displayed when necessary.
Charges. — These auctions are privately owned and
operated for profit. The seller pays the auction company
on a commission basis, usually from ll/2 to 2 1/2 per cent.
Value of auction company's services. — There has been
a considerable discussion of the value of the auction's
services and of the efficiency of the auction as a piece of
marketing machinery. Many have been impressed with
the economy in its operation. An organization selling
for iy2 to 2l/2 per cent appears to furnish an economical
Auctions, Exchanges, and Speculation 91
marketing method. One auctioneer sells as many goods
as several salesmen selling privately, which means low
selling expenses. Other expenses, however, are involved.
Out-of-town sellers must ordinarily employ representa-
tives to look after their interests at the auction, and the
buyers must spend much time attending the auctions or
must employ brokers to buy for them.
Complaints of abuses in the conduct of the auctions
have been heard. The goods of certain sellers may be
favored in the sale, the sellers may bid in their own
goods, the auctioneer may favor certain buyers, or goods
may be withdrawn from sale to raise prices.1 These com-
plaints apply to auctions in general and not particularly
to fruit auctions.
Some of the advocates of the auction system have been
so impressed with its efficiency that they have advocated
its extension to all large markets and to other commodi-
ties. To secure fair operation and greater confidence
from the buyers, some have proposed that the auctions
be regulated by the government. One proposal is that
any farmer or country shipper be allowed to ship goods
to the auction company for sale, or to a public official
who would have them sold at auction. This would
assure the owner of an outlet for his goods, but there
would, of course, be no assurance that he would be
satisfied with the price received.
The auctions are very interesting parts of our market
structure. When fairly conducted, they seem to market
goods economically. The subject of extending their
operations should be carefully studied.
1 Other abuses reported at times are selling some goods privately
before the auction starts, and the announcement of fictitious bids by
the auctioneer,
92 Auctions, Exchanges, and Speculation
Commodity Exchanges
A commodity exchange is an organization which pro-
vides facilities for trading in certain staple kinds of
produce by its members. The facilities consist of a
meeting place, a force of employees to keep records and
handle the details of operation, rules regulating the
conduct of business by members, and information con-
cerning supplies and prices. The exchange itself does
not buy or sell, nor does it handle the goods physically.
It merely provides facilities for trading by members.
In the public mind the exchange is associated with
the activities of people who buy and sell on its floor.2
In judging the value of exchanges, we must consider
both the operation of the exchanges and the trading that
centers around them, which is often speculative. A con-
sideration of the exchanges therefore leads to a discussion
of speculation.
Exchanges distinguished from auctions. — In some
respects the exchanges resemble auctions. There are,
however, several differences. An auction is open to the
public; an exchange is open only to its members. The
auction is conducted under very loose rules; the ex-
change has very strict rules. In an auction, the auction-
eer does all the selling. In an exchange any member is
free to sell. In an auction, goods offered for sale go
to the highest bidder (unless a right to reject bids is
retained by the seller), while on an exchange, the seller
names the price which he is willing to accept.
Products handled. — Some of the commodities bought
arid sold on exchange floors are grains (wheat, corn, oats,
2 A commodity, or produce, exchange must not be confused with
farmers' cooperative associations, which are frequently called exchanges.
In order to avoid confusion in this volume, the word "exchange" is
not used to refer to farmers' organizations.
Auctions, Exchanges, and Speculation 93
rye, barley, and flaxseed), cotton, butter, eggs, pork
products, cottonseed oil, rubber, raw silk, sugar, cheese,
coffee, cocoa, tin, hides, copper, lead, and zinc. Ex-
changes are located in nearly all large cities. Some
of the more important ones are: the Chicago Board of
Courtesy Chicago Board of Trade.
Fig. 6. — Trading floor of a large commodity exchange — the
Chicago Board of Trade.
Trade; the Minneapolis Chamber of Commerce; the
New York Cotton Exchange; the New Orleans Cotton
Exchange; the New York. Mercantile Exchange; the
Chicago Mercantile Exchange; the Commodity Ex-
change, Inc.; the Coffee, Sugar, and Cocoa Exchanges;
and the Kansas City Board of Trade.
Call and continuous markets. — Exchanges operate in
two ways. Some hold meetings at a definite hour each
day or each week, and some are open continuously
several hours daily.
94 Auctions, Exchanges, and Speculation
The former is known as the call method. Under this
method business is conducted with the help of a black-
board (hence the name "board" which is often used as
a name for commodity exchanges). Members who have
goods to sell offer them at certain prices. These prices
are written on the board. Other members who want
these goods bid for them. The bids are also written
on the board. If the bids are as high as the prices
offered, sales are made. When all offers and bids are
made, the meeting is adjourned until the next meeting
time. The call method is used principally by the smaller
exchanges.
Spots and futures. — The business transacted on the
floors of the exchanges is of two kinds. First, there is
the spot, or cash, business, when sales are made for
immediate delivery. Second, there are contracts made
for the sale of products during some future month ; these
contracts are known as futures.
In regard to spot sales, the exchange is really a meet-
ing place where dealers gather at specified times and
buy and sell from each other, sometimes using the call
method. The actual goods are not at the exchange.
Sales are made from samples, by grades, or by both
sample and grade. In the latter case, the seller displays
samples of his goods (oats, for example) which have been
graded by the licensed inspector and assigned a definite
grade, such as No. 4. It is apparently economical for
the buyers and sellers to have a definite meeting place.
It saves time in getting together. Sales by grade and
sample save time in inspecting and handling the goods.
Business conducted on the exchange is conducted under
strict rules. The dealers were formerly accused of meet-
ing on exchanges and arbitrarily fixing prices. This prac-
Auctions, Exchanges, and Speculation 95
tice, however, has been stopped, and relatively little
complaint is now heard against the spot markets con-
ducted by the exchanges. They are generally endorsed
as an efficient marketing method.
In regard to future sales, the exchange provides a
meeting place where its members make future contracts,
and it provides rules that make reasonably sure of the
fulfillment of the contracts.3 The future markets estab-
lished by the exchanges are used for two purposes:
speculation and hedging. These are discussed below.
Future trading. — The controversy over the value of
the exchanges centers in future trading. Most of the
speculation and most of the alleged manipulation of
prices occur in the future markets.
Speculation on future markets is alleged to be one of
the worst forms of gambling. It is alleged that the spec-
ulators arbitrarily manipulate prices to their own ad-
vantage and against the interest of the farmers. The
speculators are supposed to depress prices when the
farmers are selling their crops and then later on boost
them. On this point, Senator Capper has said: "In
three short months last summer (1928), the grain gam-
blers on the Chicago Board of Trade mulcted the grain
farmers of Kansas out of $75,000,000 through a legalized
gambling device in which the wheat grower neither draws
cards nor is allowed to shoot dice. He only furnishes
stakes in the game and, no matter who among the
gamblers win, the grower loses. It is an economic crime,
a business blunder, and legislative insanity to allow this
condition to continue."
3 Insolvency of a brokerage house may mean that a contract is not
fully satisfied.
96 Auctions, Exchanges, and Speculation
In favor of future trading, it is pointed out that it
makes hedging possible. Further, it is said to stabilize
prices and to give an indication of the level of future
prices.
Speculation
Speculation is an attempt to make a profit from a
change in price and not by performing a service. Specu-
lative contracts to buy or sell goods can be easily made
at all times upon the floors of the larger exchanges. It
is not necessary for the speculator to put up enough
money to cover the entire price of his purchase or his
sale. He simply puts up enough money with his broker
to cover probable fluctuations in price. This amount is
called a margin.
Marginal dealing. — Marginal dealing enables one to
increase the amount of his trading. Suppose that a
man has $1,000 and wishes to speculate in wheat, which
is $1 a bushel. If he had to pay the entire purchase
price, he could buy only 1,000 bushels. Suppose he buys
1,000 bushels and the price advances to $1.05. He has
made a profit of 5^ a bushel, or $50. But suppose he
can buy this wheat on a margin of 10 per cent of the
price. His $1,000 will serve as a margin for 10,000
bushels. If the price rises 5^, his gain is increased
tenfold- to $500. Similarly, his loss will be ten times
greater if the price declines.
Short selling. — When one speculates in actual goods,
he must ordinarily buy the actual commodity and hold
it for an advance in price. Future trading involves
dealing in contracts for future execution. This makes
it possible to contract to sell a product which at the
time one does not own. One does this when he believes
the price is going down. If wheat is $1 a bushel and
Auctions, Exchanges, and Speculation 97
he believes that the price will drop to 95^, he orders
his broker to sell wheat. He hopes that the price will
drop and that he can repurchase the wheat at a price
of less than $1 to deliver on his contract at $1.
Marginal dealing and short selling are made possible
by future trading on organized exchanges. They are
seldom found in ordinary private sales.
Evils of speculation. — Speculation is not without
attendant evils. People lose money that is needed for
living expenses, better homes, and education. Embezzle-
ment, broken health, and suicide are often caused by
speculative losses, and much harm is likewise done by
speculative profits. Stories of large gains are widely
circulated — much more widely circulated than the stories
of losses. These stories excite others to try to make
money without working, thus limiting industry and dis-
couraging thrift. No real advancement can be made
without work, and the attempt to live without it is bad
both for the individual and for society. Very few suc-
ceed. Those who do usually spend the money unwisely
and set a bad example for others. Those who fail at
best lose money which they could have put to better
purpose; at worst they are led to crime or premature
graves.
Speculation takes time and mental energy that could
be spent to much better advantage. Just think what
could be accomplished if all the time and attention spent
in speculation, in following prices, and in listening to
gossip and tips were devoted to a useful purpose ! Spec-
ulation is a kind of contagious disease. It affects many
who only pretend to speculate — who speculate only in
their minds for imaginary profits.
The machinery necessary to carry on speculation is
expensive. It has been estimated that the direct cost
98 Auctions, Exchanges, and Speculation
of conducting one speculative market — the Chicago
Board of Trade— is over $20,000,000 a year.
If speculation has so many evils, why is it not abol-
ished? Congress would probably have abolished it long
ago except for one fact — it permits hedging.4
Hedging. — Hedging supplies a kind of insurance
against price changes. The insurance companies issue
policies against many hazards, such as fire, rain, hail,
tornado, and theft, but they do not write policies against
changes in prices. Hedging is possible only when future
trading exists.
Hedging is the future sale or purchase of goods to
offset or balance dealings in the actual product. It
ordinarily involves a purchase and a sale of the same
amount of the same commodity in two markets — the
spot market and the future market. A simple example
of hedging is furnished by a grain elevator that pur-
chases wheat. If the price of this wheat drops while
it is owned, the elevator will lose money. To avoid this
danger, the elevator may sell an equal amount of wheat
for future delivery. Now if the price of wheat drops,
it will lose money on the wheat in storage, but it can
buy wheat for delivery on its future contract at a lower
price and so make a profit on the future sale equal to
the loss on the actual wheat on hand.
Hedging illustrated. — Let us assume that in a central
market on July 1 the price of September wheat is $1
a bushel, that the freight rate to this market from a
country point is 10^ a bushel, and that the elevator
located at the country point needs 5^ a bushel to cover
its operating expenses and its profit. The elevator offers
4 Speculation is usually legal because the contracts call for actual
delivery of goods. As a matter of fact, however, few goods are de-
livered on future contracts.
Auctions, Exchanges, and Speculation 99
the farmer 85^ a bushel. On July 1, it buys 1,000 bushels
of wheat at 85^. Now if the price goes down, it will
lose money. To prevent this, it sells 1,000 bushels of
wheat for delivery in September at the future price
of $1.
On August 1, the wheat reaches the central market and
is sold. The spot (cash) price is 90^. The elevator loses
10^ a bushel on the spot wheat. If it had not hedged,
therefore, its loss would be $100.
The price of September wheat has also probably de-
clined, perhaps to 90^. The elevator buys in its hedge
at 90^ and makes a profit of 10^ a bushel, or $100, on its
future contract. The profit on the future offsets the loss
on the spot transaction, and the elevator has its 5$ mar-
gin to cover operating expenses and profit.5
The account stands thus:
Purchases
July 1—1,000 bu. spot wheat @ 85*f $850
Aug. 1—1,000 bu, Sept. wheat @ 90?f . . . . 900
Total purchases $1,750
Sales
July 1—1,000 bu. Sept. wheat © $1 . . . .$1,000
Aug. 1—1,000 bu. spot wheat @ 9ty . . . . 900
Total sales 1,900
Difference between sales and purchases $150
Freight to get wheat to central market 100
Elevator's margin $50
5 Hedging does not always work out in this way. The future price
may be above the spot price or below the spot price at the time goods
are purchased. As the future month approaches, the prices tend to
come together. It is much more satisfactory for the owner of goods
to hedge when future prices are above spot prices than when the op-
posite is true. All grades of goods are handled, but hedges can be
made only in the future (contract) grade. The prices of the varioua
grades of a product do not always move together.
100 Auctions, Exchanges, and Speculation
Hedging can similarly be used to protect margins on
future sales. Suppose a cotton mill sells cloth in March
for August delivery, based on the price of cotton for
August delivery which is 15^ a pound. It can buy cot-
ton for future delivery in August for manufacture into
cloth at 15^ and so protect itself against an advance in
the price of cotton.
Advantages of hedging. — The advantage of hedging
to the one doing the hedging is that it enables him to
shift a part of the risk of price changes to others. This
enables him to conduct his business on narrower mar-
gins, which, in turn, enables him to pay more for the
goods handled or to sell them at lower prices. Many of
the products dealt in on exchanges are farm products.
Hedging thus enables the buyers of these products to
pay the farmers higher prices than they could if they
had to assume the risks of price changes.
Chapter 6
Review Questions
1. In what two ways may goods be sold?
2. What are the characteristics of auction sales?
3. What factors determine prices at an auction?
4. What is meant by "as is"?
5. What marketing functions are performed by auctions?
6. What can you say of the importance of auctions in the
United States?
7. What are the different types of auctions?
8. How do the fruit auctions operate?
9. What position does the fruit auction occupy in the
trade channel?
Auctions, Exchanges, and Speculation 101
10. What charges does the fruit auction make for its
services?
11. Is the auction an economical method of marketing?
Does it help the sellers? Does it help the buyers?
12. What is a commodity exchange? How does it differ
from an auction?
13. Distinguish between call and continuous markets. How
does a call market operate?
14. Distinguish between spot and future sales.
15. Is the spot business desirable? Have any objections
been made to it?
16. What is future trading?
17. Name the arguments for and against future trading.
18. What is speculation?
19. What is meant by dealing on a margin?
20. What is meant by short selling?
21. What are the evils of speculation?
22. Why is speculation on organized exchanges allowed to
persist?
23. What is hedging? Illustrate.
24. What are the advantages of hedging?
25. What are the limitations on hedging?
Thought Problems
1. What types of auctions are held in your community?
Are any of these held regularly?
2. Sellers naturally have their goods sold in the way that
they think will bring them the highest prices. Those who
use the auction believe that they receive higher prices at
auction than they would at private sale. Do you agree?
Why or why not?
3. It was stated in this chapter that out-of-town fruit
.shippers have to have local representatives when they sell
102 Auctions, Exchanges, and Speculation
at auction. The auction companies do not like to act as
consignees. It has been suggested that the auction companies
act as consignees, receive goods direct from growers, and
relieve out-of-town shippers of the expense of hiring repre-
sentatives to protect their interests. Comment.
4. It has been argued that speculation is justified because
it gives pleasure to the speculators — in other words, that the
speculators use it for a game and not for a source of profit.
Do you believe that speculation is justified by the pleasure
that it gives to the speculators?
5. Speculators have been called gamblers, and it is said
that most of the speculation on the exchanges is gambling.
On the other hand, some persons make a distinction between
speculation and gambling. Can you draw a logical distinc-
tion?
6. Using figures, illustrate hedging transactions for the fol-
lowing types of concerns: a country elevator; a flour mill;
a cotton mill that buys cotton to cover its future needs.
CHAPTER 7
Wholesalers
Wholesaler defined. — A wholesaler is a merchant who
sells to other merchants and to manufacturers, contrac-
tors, hotels, institutions, and others who buy in large
quantities. The wholesaler is a merchant; that is, he
buys goods and has title to them and sells them in an
attempt to make a profit.
Place in trade channel. — The wholesaler is ordinarily
thought of as occupying a position in the trade channel
between the manufacturer or the country shipper, and
the retailer. Many wholesalers buy from manufacturers,
brokers, country shippers, and farmers' cooperative as-
sociations and sell to retail dealers. These wholesalers
are often called jobbers.
Other wholesalers handle industrial goods — raw ma-
terials, machinery, and equipment — and sell to manu-
facturers, contractors, mine operators, railroads, and pub-
lic utilities. Some of these wholesalers are called "mill
supply houses. " Many small manufacturers depend
upon them for raw materials and equipment, while large
manufacturers patronize them for fill-in lots which they
need quickly. Industrial wholesalers handle such prod-
ucts as machinery, cotton, wool, cloth, grain, flour, lum-
ber, metals, leather, electrical equipment, and office and
mine supplies. Many wholesalers, such as hardware and
electrical jobbers, sell to both retailers and industrial
103
104 Wholesalers
buyers. The operations of wholesalers handling indus-
trial goods are discussed in Chapter 13.
Usefulness of wholesalers. — The wholesaler is a very
useful merchant and is, in fact, almost indispensable to
the smaller retailers. Most retailers handle goods made
by hundreds of manufacturers, and many of them must
buy in small quantities. The manufacturer cannot sell
them such small quantities economically; nor can he,
as a rule, supply them goods as quickly as the whole-
saler. They must often buy on credit, and yet many
have such poor credit ratings that many manufacturers
are unwilling to take the risk of selling to them on credit.
Wholesalers are also useful to the manufacturers,
serving as the manufacturers' sales organizations and
regional warehouses. Many specialty manufacturers are
not in a position to solicit business from the retailers, as
the selling expense would be too high. To illustrate,
take the case of a manufacturer who has only one prod-
uct which he sells to the retailers at 84(5 a dozen. The
retailers ordinarily buy this product in quantities of one
and two dozen. Let us suppose that this manufacturer
employs salesmen to sell the retailers. They can visit
only a few retailers each day, and they cannot sell all
the retailers visited. They probably will not average
more than 8 sales per day. If the sales average a dozen
and a half each, the daily sales of each salesman will
amount to only $10.08. His salary and expenses will be
likely to average at least $7.50 a day. This would give
the manufacturer a selling expense of 75 per cent. It
is evident, therefore, that this manufacturer cannot prof-
itably sell direct to the small retailers. The wholesaler,
however, has many products to sell. The expenses of
his salesmen are divided between hundreds of products
Wholesalers
105
so that each has to pay for only a small part of the sales-
man's time.
Volume of wholesale trade. — The Census has com-
piled data for wholesale and retail trade for the years
1929 and 1933. All non-retail middlemen are included
in the wholesale census, which therefore includes not only
wholesalers as defined above but also manufacturers'
branch houses, brokers, chain store warehouses, and as-
semblers of farm products. Nineteen twenty-nine was
a year of business prosperity, whereas 1933 was a year
of severe business depression.
TABLE 3 —SALES AND EXPENSES OF VARIOUS
TYPES OF NON-RETAIL MIDDLEMEN
Number Sales Per Cent
Type of Middlemen* (in millions) Expense
1929 19S3 1929 1938 1929 1933
Wholesale merchants. . .
Service wholesalers . .
Exporters ........
Importers ......
Limited functional
wholesalers ........
79,784 82,805 $29,288 $12,997 11.7 15.0
74,47(5
754
2,202
76,850
453
2,170
2,292 3,380
25,371 11,303 12.4 15.8
1,508 558 3.8 6.1
1,808 776 7.0 10.5
601 360 9.6 11.5
Manufacturers' sales
branches
With stocks
17,086
f
16,873
12,444
16,336
f
7,557
5,144
9.8
f
12.5
14.9
Without stocks
f
4,429
f
2,413
f
74
Bulk tank stations . . .
Chain store warehouses
Agents and brokers . .
Assemblers and country
buyers
19,611
559
18,388
34,226
26,190
462
13,818
23,962
2,390
1,930
14,257
4,749
1,889
1,432
6,502
1,774
11.3
4.3
3.2
4.5
19.7
4.5
3.2
9.8
Assemblers of farm
products
Cooperative assns
Cream stations
21,884
4,208
f
11,283
2,732
2,860
2,304
1,458
t
719
686
• 31
t
4.8
t
10.8
9.6
15.6
Grain elevators
8,134
7,087
987
338
t
7.5
Total
169,654
164,170
$68,950
$32,151
8.9
11.5
* Establishments, not companies. One company may operate several establishments,
t Figures not available, usually owing to a cnange in classification.
It will be seen by the figures in Table 3 that the total
number of establishments in the wholesale trade was
106 Wholesalers
169,654 in 1929 and 164,170 in 1933. Total sales were
almost 69 billions of dollars in 1929 and over 32 billions
in 1933. The percentage of expenses increased from 8.9
to 11.5. This increase in percentage resulted from the
fact that expenses are made up largely of wages, rents,
taxes, advertising, interest on borrowed money, and pub-
lic utility charges. The expenses for these do not vary
with changes in the prices of goods. When the prices of
goods increase or decrease, there is a lag in wages, rents,
and taxes, in advertising, and in public utility rates.
During this four-year period the actual expenses of the
various types of wholesale middlemen decreased nearly
40 per cent. However, volume of sales decreased 56
per cent, so that the expense percentage increased. Of
the decrease in the volume of sales, 31 per cent was due
to a decline in the prices of the goods handled and 25
per cent was due to a decline in the quantity of goods
handled. As the volume of sales increases, from the low
of 1933, we find the percentage of expense declining.
Types of wholesale middlemen listed by Census. —
The principal types of middlemen listed in Table 3 are
wholesale merchants, manufacturers' sales branches, bulk
tank stations, chain store warehouses, agents and brokers,
and assemblers of farm products. This chapter deals
especially with the operations of wholesale merchants.
Manufacturers' sales branches that carry stock are com-
monly known as "manufacturers' branch houses/' and
perform about the same functions as wholesale mer-
chants and will not be discussed separately. Manufac-
turers' sales offices that do not carry stocks more nearly
resemble selling agents in the functions performed and
methods of operation. Bulk tank stations are whole-
sale middlemen engaged in the distribution of gasoline
Wholesalers 107
and oil They operate tank trucks and deliver to filling
stations — some are independent, but the great majority
are operated by the oil refiners. Chain store warehouses
are wholesale houses operated by chain stores, particu-
larly grocery chains, to supply their retail stores. They
operate in many respects like wholesale merchants, and
will be discussed in Chapter 11. The operations of agents
and brokers were discussed in Chapter 5. Assemblers
of farm products differ in many respects from other types
of wholesalers and will be discussed in Chapters 15-18,
which deal with the marketing of farm products.
Wholesale merchants. — The Census divides wholesale
merchants into four main groups: service wholesalers
(called by the Census "wholesale merchants"), exporters,
importers, and limited function wholesalers. The latter
group includes cash-carry wholesalers, mail-order whole-
salers, truck wholesalers ("wagon jobbers"), and drop
shippers. It will be noted from the figures in Table 3
that the number of both service and limited function
wholesalers increased between 1929 and 1933. This is
interesting in view of the fact that the sales of the serv-
ice wholesalers declined 55 per cent and those of the
limited function wholesalers 40 per cent. There was, in
1933, one wholesale merchant to every 18 retailers and
to every 1,500 people. Many of these wholesalers, how-
ever, sell to industrial buyers, so that the wholesalers
selling to retailers supply, on the average, more than 18
stores.
Goods handled. — Wholesale merchants may be classi-
fied according to the types of goods handled. Wholesalers
are found handling almost every conceivable product
from advertising goods to yarn. Some of the more im-
portant types of goods handled are: automobiles and
108 Wholesalers
accessories, coal, drugs, dry goods, clothing, electrical
goods, chemicals, grain, cotton, livestock, fruits and veg-
etables, wool, eggs, poultry, groceries, meats, furniture,
house furnishings, jewelry, shoes, leather goods, lumber
and building material, machinery, paper, hardware,
Courtesy Pennsylvania ItailroaiL.
Fig. 7. — A wholesale fruit and vegetable market which helps
to supply the needs of a large city. Note that some of the cars
are unloaded directly into the space where goods are sold by the
wholesalers, and that other cars are on team tracks where the goods
can be unloaded into trucks and hauled directly to the stores of the
dealers, or from which the cars can be reconsigned to other markets.
plumbing and heating supplies, tobacco, confectionery,
dairy products, textiles, and metals.
Some wholesalers handle full lines of goods. The hard-
ware wholesaler, for example, may handle from 20,000
to 80,000 items if sizes are counted. Wholesalers han-
dling dry goods, electrical merchandise, groceries, drugs,
stationery, and some other products carry thousands of
items in stock. These are known as full-line wholesalers.
There are, on the other hand, wholesalers who specialize
Wholesalers
109
in certain products such as potatoes, butter, poultry, knit
goods, and hats. These are known as specialty whole-
salers.
Ownership. — With respect to ownership, wholesalers
may be classified as independent or privately owned;
manufacturers' branch houses; chain store warehouses;
Courtesy V. S. Dept. Agriculture.
Fig. 8. — A jobbing and wholesale market from which a large
city obtains a great part of its fruits and vegetables.
and wholesale warehouses owned by independent retail-
ers. Wholesale warehouses operated by manufacturers
and chain stores are parts of integrated organizations
and are not independent merchants. They, however,
perform most of the wholesale functions.
Territory. — Some wholesalers cover large territories,
occasionally the entire country. These are called sec-
tional or national wholesalers. They often operate a
number of warehouses. On the other hand, there are
L10 Wholesalers
wholesalers who cover only a small territory, one city,
me county, or a part of a large city. These are called
.ocal wholesalers. They often have lower expenses than
;he national wholesalers as a result of more limited
stocks, faster rates of stock turnover, less delivery ex-
Dense, less expense for salesmen, or less service furnished
;O customers.
Method of operation. — Wholesalers may be classified
iccording to the method of operation or the services per-
'ormed. Some of the types operating in different ways
ire the service wholesaler, cash-carry wholesaler; truck-
vholesaler or wagon jobber; and the mail-order whole-
;aler.
Functions performed. — The functions performed by
lifferent types of wholesalers vary considerably. The
lervice wholesaler usually performs 9 or 10 of the 12
narketing functions and may perform all 12. The
;arlot wholesaler who handles goods in railroad cars,
m the other hand, performs primarily the buying and
selling functions and the general business functions of
isking, financing, and recording.
The service wholesaler. — The service wholesaler is one
vho carries goods in stock, who has a force of salesmen
o solicit orders, and who extends credit to his customers.
3erhaps his most important functions are: storing, buy-
ng, dividing, selling, extending credit to the retailers
financing), packing, and delivering goods to the buyers
'transporting). Risking and recording are, of course,
nvolved. This type of wholesaler does not ordinarily
itandardize or grade goods.
Storing. — The retailer expects the wholesaler to carry
ully assorted stocks of goods so that he can obtain any
lesired goods on short notice. Promptness in making
Wholesalers 111
deliveries is one of the main requisites for success in
wholesaling.
The wholesaler often reduces transportation costs by
carrying stocks in strategic points. To illustrate, a man-
ufacturer is located at X and a retailer at Y. The re-
tailer's sales are too small to allow him to buy in
carloads. The less-than-carload rate from X to Y may
be $1 per 100 pounds. A wholesaler is located at Z.
LCL rate
He buys in carloads and receives a carload rate of
from X to Z. He sells to the retailer at Y. To get the
goods from Z to Y involves a less-than-carload rate of
25^. The total freight from factory to retailer when the
goods are handled by the wholesaler is 65^, whereas if
they were shipped direct to the retailer by the manu-
facturer, the freight would be $1.
Buying. — It is the wholesaler's job to know what his
customers need, to find where the goods can be obtained,
and to buy them at prices that will enable his retail
customers to meet the prices of their competitors.
Dividing. — The retailers often want to buy goods in
very small lots. The retailer often purchases slow selling
goods by the case, half-case, dozen, half-dozen, quarter-
dozen, or even in single units. The wholesaler is likely
to receive orders for less than $5.00 that call for several
different articles. The dividing and packing necessary
to fill such small orders increase the wholesaler's expense,
The retailer is often criticised for buying in such
112 Wholesalers
small amounts. Many of his orders are unnecessarily
small. The retailer often divides his business among too
many wholesalers. He is often a poor stockkeeper, and
orders so often that he increases his own expenses for
buying and transportation. Some wholesalers refuse
orders from retailers who continually order in small lots.
It is one thing to ask for a small "fill-in" item occasion-
ally, but it is an entirely different matter when the
retailer regularly orders in very small lots.
Selling. — The service wholesaler has a force of travel-
ing salesmen who call upon the retailers and ask for
business. The wholesaler's salesmen came into existence
with the building of the railroads and for several decades
traveled largely by train; today most of them travel
in automobiles. Often these salesmen have been mere
order takers. "What's on your want list today?" is too
often the main part of their sales talk. The retailer
could just as well order most of his staple merchandise
by mail or telephone, for he knows his own needs. Why
does the seller have to pay a man to come around and
ask him for the order? Competition is the answer. The
retailer will generally give his orders to the salesman who
comes and asks for them. The chain store has no sales-
men to sell to its retail stores and thus saves this selling
expense. In spite of the criticism of the wholesaler's
salesmen, however, they build goodwill for their em-
ployer and give the retailers valuable advice.
The manufacturer expects the wholesalers to sell his
goods and has often been disappointed because they do
not actively push his wares. He overlooks the fact that
the wholesaler is in business primarily to supply the
needs of the retailers and not to sell the product of any
particular manufacturer.
Specialty salesmen. — Manufacturers are often dissat-
a/? —
114 Wholesalers
isfied with the volume of sales made by the wholesalers.
Many employ their own salesmen to call upon the re-
tailers from time to time and solicit business. These
men are called specialty salesmen. The manufacturer
thus assists the wholesaler in performing the selling
function.1
Credit. — The service wholesaler extends credit to the
retailers. Many retailers have such limited capital that
they could not stay in business without the credit ex-
tended by the wholesalers. In fact, the wholesaler is
often criticised for being too liberal with credit and
inducing people to enter the retail business who have
insufficient capital.
Delivery. — Many service wholesalers operate their own
delivery trucks and deliver goods to the retailers within
certain areas, often without extra charge.
Cash-carry wholesalers. — The cash-carry wholesaler
carries goods in stock but does not give free delivery
nor extend credit to retailers. He frequently does not
have outside salesmen. The retailers come to his store,
select their goods, pay cash for them and haul them
home; or they may order by telephone and have the
goods delivered on a C.O.D. basis. The cash-carry
wholesaler eliminates the expenses of traveling salesmen,
of extending credit and making collections, and of a
considerable portion of the bookkeeping expense.
In the grocery trade, service wholesalers ordinarily
have expenses of from 8 to 12 per cent, while the cash-
carry wholesalers have an expense of 4 to 5 per cent.2
1 In some cases the manufacturer performs the entire selling func-
tion, the wholesaler being used only for storing, dividing, extending
credit to the retailers, and keeping account of the transactions. The
manufacturer's specialty salesmen apparently add to marketing expense.
2 Census figures in the grocery trade for 1929 show average expenses
of 9 to 10 per cent for service wholesalers and 3 to 5 per cent for cash-
carry wholesalers.
Wholesalers 115
Although this indicates a saving of 4 to 7 per cent, it is
not all net saving to the retailer, for he must go after
the goods in his delivery wagon or pay for this delivery.
He must also consider the interest on the money when
he buys for cash. Nevertheless, there is a saving to the
retailer on staple merchandise. In order to meet chain
store prices, many independent retailers are patronizing
cash-carry wholesalers, or cash-carry departments of
service wholesalers. Figures for limited function whole-
salers were published in the 1929 Census and are shown
in Table 4.
TABLE 4.— SALES AND EXPENSES OF LIMITED FUNCTION
WHOLESALERS IN 1929
Number of Sales Ratio of Expense
Type of Wholesaler Establish- (mil- Sales to (% of
ments lions) Inventory Sales)
Cash-carry 756 179 11.0 5.7
Drop shippers 583 242 96.1 6.5
Mail-order 41 46 6.0 22.6
Truck ("wagon jobbers")... 817 90 32.1 18.8
Truck wholesalers. — Truck distribution has had a con-
siderable growth in recent years, particularly in the food
trades. Truck, or wagon, wholesalers carry the goods
with them and sell and deliver as they call upon the re-
tailers. They usually sell for cash or for very short
credit periods. Truck wholesalers are found especially
in the businesses of handling perishable foods and food
specialties, such as cheese, salad dressing, potato chips,
bakery goods, fruits, and vegetables.
Much of the growth of truck distribution is due to
the operation of trucks by manufacturers, especially in
the distribution of gasoline, and foodstuffs — bread, cakes,
pies, ice cream, meat, coffee, salad dressing, and so forth.
The drop shipper. — The drop shipper, or desk jobber,
is a wholesaler who buys and sells goods without having
116 Wholesalers
them in stock. He has title to the goods, so that he is
a merchant and not an agent. He solicits orders and
has the railroad (or truckman) deliver the goods to his
customers. His method of operation saves warehouse
expenses and he is found especially in the handling of
heavy goods such -as building materials. When the drop
shipper deals only in carlots, he may have expenses of
1 or 2 per cent as compared with 5 to 20 per cent for
the service wholesaler handling similar goods.
The mail-order wholesaler. — The mail-order whole-
saler receives orders by mail and not by salesmen. He
issues catalogs from which the buyers make their se-
lections. This method of operation saves the expense
of a sales force. Wholesalers receive many orders by
mail. The Census, however, found very few whole-
salers who secured the bulk of their business in this
way.
Semi-jobber. — A semi- jobber is a merchant who con-
ducts both a retail and a wholesale business in one es-
tablishment. Semi- jobbers are important in the sale of
hardware, farm implements, building materials, coal,
office and store equipment, motor vehicles, and oil and
gasoline.
Mutual wholesalers. — The mutual wholesaler is a pri-
vate wholesale establishment in which the retailers buy
stock or make deposits in order to secure buying privi-
leges. The mutual wholesaler ordinarily does away with
outside salesmen. Orders are received by telephone and
by mail. Credit is limited, often to the value of the
stock owned or the deposit made by the retailers. De-
livery service is often limited or charged for extra.
Overhead expenses are reduced by cheap-rent locations,
modest fixtures, and a limited number of executives.
Little of the slower moving merchandise is handled. The
Wholesalers 117
mutual wholesaler thus resembles the cash-carry whole-
saler in some respects and has similar or slightly higher
operating expenses.
Operating expenses. — The wholesaler's expenses are
made up of expenditures for labor, rent, delivery, ad-
vertising, traveling, light, heat, and so forth. These
items he thinks of as his cost of doing business. From
the standpoint of his customers and the consumers, his
cost to them is measured by the entire margin which
he takes between the price which he pays for goods and
the price he receives for them — that is, by his operating
expenses plus his profit. Wholesalers, as a rule, have
lower operating expenses than retailers, owing to the
larger units in which goods are handled. A salesman
can sell a dozen cases in about the same time as one
can or package, %The carlot wholesaler has lower ex-
penses than the jobber. The expenses of wholesalers
vary with the size of the units in which goods are bought
and sold and with the service rendered.
The operating expenses of the wholesale merchants
in the 20 trades having the largest volume of sales for
1933 are shown in Table 5 on page 118. As previously
indicated, operating expenses were high in this year.
Expense and size. — When the wholesalers are grouped
by size as measured by volume of sales (Table 5), the
average percentages of expense decrease as sales volume
increases. This fact indicates that wholesaling is a busi-
ness of decreasing cost — that is, that the larger the
volume of sales, the less the cost of doing each dollar's
worth of business. This statement must not, however,
be accepted without considerable modification. It may
be that there is a difference in the services performed
by large and small wholesalers. In 14 of the 20 trades
shown in Table 5 there were too few wholesalers with
118
Wholesalers
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Wholesalers 119
sales of over $5,000,000 to allow averages to be computed.
Out of 79,032 wholesalers covered by the Census figures,
about 70 per cent had sales under $100,000; only 1,827
reported sales of over $1,000,000; and only 45 houses
reported sales of over $10,000,000. It is evident that
the advantage of lower operating expenses is insufficient
to produce any considerable number of large whole-
salers. In many of the trades, medium-sized whole-
salers have lower expenses than large wholesalers. From
these facts we may conclude that on the average large
wholesalers have somewhat lower expenses than small
wholesalers, but that small and medium-sized whole-
salers have certain advantages in contrast with large
wholesalers. One of these advantages is their prox-
imity to customers, thus permitting quick delivery of
goods and frequent personal contacts with them.
Location. — Data gathered by the Census does not show
any particular relation between a wholesaler's expenses
and the size of the town in which he is located. In other
words, a wholesaler in a large city may be able to operate
as economically as a wholesaler in a small town in spite
of the higher scale of wages in the city.
Private brands. — Many wholesalers have adopted
brands of their own under which they sell a part of their
goods. Many of the larger retailers, such as chain and
department stores, also have their own brands. Such
brands are often called private brands to distinguish
them from the manufacturer's nationally advertised
brands. Some of the private brands, however, have alsc
been advertised. Goods for sale under private brands
may be purchased from smaller manufacturers whc
have not established their brands on the market, they
may be bought from larger manufacturers who are un-
able to sell all of their goods under their own brands
120 Wholesalers
or they may be produced in plants owned by the whole-
salers or retailers.
Advantages of private brands: Control. — There are
several reasons why wholesalers have their private
brands. First, they own the brands, which cannot there-
fore be taken from them by the manufacturer. Whole-
salers have sometimes had the manufacturer take from
them a brand which they had sold for years and sell it
direct to the retailers or through exclusive agencies. The
wholesaler must then take on other brands which are not
so well known to his customers.
Quality. — The wholesaler is often unable to control
the quality of goods sold under the manufacturer's name.
When he sells goods under his own brand name, he
claims that he can maintain a more uniform and a
superior quality. This he says he can do because he
can buy from various manufacturers. If the product
of one declines in quality, he can buy from another.
Tests of canned fruits and vegetables show no substan-
tial difference in the quality of the goods sold under
manufacturers' brands and under private brands.
Price. — Manufacturers' nationally advertised brands
are frequently used as cut price leaders by retail stores.
Other retailers are thus forced to insist upon buying such
goods at prices low enough to enable them to meet the
prices of cut-price stores, which often means that such
goods are sold with little or no profit by" both whole-
salers and retailers. Wholesalers, therefore, often resort
to private brands to meet this situation.
Goods to be sold under private brands can usually be
bought cheaper than goods bearing the manufacturer's
label. A study by the Federal Trade Commission shows
that, as a rule, the wholesaler buys goods for his private
brand at a lower price than goods under a manufacturer's
Wholesalers 121
well-known brand, sells them to the retailer at a lower
price, and at the same time makes a larger margin. The
retailer, in turn, buys goods under a private brand
cheaper than similar goods under national brands, sells
them at a somewhat lower price, and at the same time
makes a larger margin. This is shown by the figures in
Table 6, which give averages for groceries and dry goods.
TABLE 6.— COSTS, SELLING PRICES, AND MARGINS OF
WHOLESALERS AND RETAILERS ON NATIONAL AND
PRIVATE BRANDS
(Federal Trade Commission's Figures)
GROCERIES DRY GOODS
National Private National Private
Brand Brand Brand Brand
Wholesaler's buying price.. .. $1.00 $0.85 $1.00 $0.85
Wholesaler's price to retailer .. 1.13 0.99 1.19 1.05
Retailer's price to consumer 1.45 1.32 1.80 1.63
Margin, per cent of sales:
Wholesaler 11.4 13.9 15.6 19.4
Retailer 22.0 24.9 33.9 35.5
It will be noted in these cases that the wholesalers
bought goods for their own brands 15 per cent lower than
similar goods bearing the manufacturer's label. In the
case of drugs there was a difference of 19 per cent, and
in the case of hardware, 16 per cent.
If we take a nationally advertised grocery item that
cost the wholesaler $1, a similar article could be pur-
chased for sale under his own brand for 85 cents. The
wholesaler sold the nationally advertised brand to. the
retailer for $1.13, while he sold his private brand for
99 cents. The retailer sold the manufacturer's brand
to the consumer for $1.45, whereas he sold the private
brand for $1.32. The consumer thus saved 13 cents
by buying the private brand. The wholesaler made 11.4
per cent margin on the national brand and 13.9 per
cent on the private brand. The retailer made 22 per
122 ' Wholesalers
cent on the national brand and 24.9 per cent on the
private brand. Both the wholesaler and retailer secured
larger percentages of margin on the private brand and
passed on a part of the saving to the consumer.
Disadvantages of private brands. — The manufacturer
of nationally advertised goods does not admit the ad-
vantages of private brands listed above. He claims that
his goods are of superior quality to those sold under pri-
vate brands. He says that a producer is more careful of
the quality of goods bearing his own name than of
goods sold under another's name. He also argues that
there is so much consumer demand for his advertised
goods that they can be sold at much lower expense than
goods under unknown private brands. Even if the
wholesalers and retailers make larger margins on private
brands, he argues, they have larger expenses in selling
them and so make more net profit on well-known nation-
ally advertised goods. More time and sales effort are re-
quired to persuade the customers to accept private
brands than national brands which are widely known.
He also says that the wholesaler must buy goods for his
private brands in larger quantities and store them
longer, so that the storage expense is higher and stock
turnover reduced.
Conclusion on private brands. — Information at hand
is insufficient to allow a definite statement to be made
as to the cost of selling national and private brands.
Many private brands are now well known in the terri-
tories where they are sold and are generally accepted by
the consumers. In such cases, little if any more effort
is required to sell them than that required to sell na-
tional brands. It does require more time to sell unknown
brands than to sell brands which are well and favorably
Wholesalers 123
known; this is true whether the unknown brand is a
private brand or a manufacturer's brand.
Future of the wholesaler. — Many manufacturers have
established their own selling organizations and sell direct
to the retailers. Unless they have several products to
sell, their expenses of selling the retailers are likely to be
higher than those of the wholesaler. Some manufac-
turers sell direct to the retailers in spite of the higher
cost, in order to put more sales effort behind their goods
and secure a larger volume of sales. Large retailers,
such as department and chain stores, often buy many of
their goods direct from the manufacturers and use the
wholesaler only for fill-in lots when they are out of stock.
These transactions tend to reduce the volume of business
done by the wholesaler. Some observers have predicted
the eventual elimination of the wholesaler from the trade
channel. As long as we have small retailers and small
manufacturers, however, the wholesaler is a necessity.
The small manufacturer cannot afford to sell direct to
the retailers, and the small retailers cannot afford to con-
tact the manufacturers. For this reason, we shall con-
tinue to have wholesalers.
When we talk about eliminating the wholesaler, we
mean eliminating the independent wholesaler and not
his functions. The wholesale functions appear to be nec-
essary. When direct connections are established between
the manufacturer and the retailer, the wholesale func-
tions are shifted to either the manufacturer or the re-
tailer. The manufacturer's branch house and the chain
store warehouse are performing the wholesale functions.
They may or may not be able to perform these functions
more cheaply than the independent wholesaler.
124 Wholesalers
Chapter 7
Review Questions
1. Define the term "wholesaler.7' How are wholesalers
classified?
2. What is the place of the wholesaler in the trade
channel?
3. What can you say of the wholesaler of industrial goods?
4. Is there a distinction between a wholesaler and a job-
ber? What is meant by a carlot receiver?
5. Of what use is the wholesaler to the retailer?
6. Of what use is the wholesaler to the manufacturer?
7. What can you say of the importance of wholesalers?
8. What functions does the service wholesaler perform?
Which are the more important ones?
9. Why should goods be stored near the points of con-
sumption?
10. How does the wholesaler perform the dividing func-
tion?
11. How does the service wholesaler perform the selling
function?
12. Is it cheaper for the wholesaler or the manufacturer
to sell to retailers? Why?
13. What are specialty salesmen, as the term is used in
this chapter?
14. Why do the manufacturers employ specialty salesmen?
15. What are cash-carry wholesalers? Why do they exist?
How do they reduce expenses?
16. How do truck wholesalers operate? What services do
they perform?
17. What is a semi-jobber?
18. What determines the costs of operating a wholesale
business?
Wholesalers 125
19. Why can a wholesaler operate more cheaply than a
retailer handling the same kind of goods?
20. What is the relation between a wholesaler's volume of
sales and his expenses?
21. What is the relation of a wholesaler's expenses and the
size of town where he is located?
22. What are private brands? What are the advantages
and disadvantages to their owners?
23. What can you say of the cost of private brand goods
to wholesalers, retailers, and consumers? What of the whole-
saler's margin on such goods?
24. What can you say of the quality of goods sold under
private brands?
25. What can you say of the future of the independent
wholesaler?
Thought Problems
1. The manufacturer has often considered the wholesaler
as his sales department. On the other hand, the retailer has
thought of the wholesaler as his supply department. Which
is correct? Why?
2. Why do retailers buy in such small lots? Some manu-
facturers and wholesalers have applied cost accounting to
their activities and have refused to sell to retailers who buy
in such small quantities that doing business with them is
unprofitable. Is this a wise policy? How does it affect the
retailers?
3. The wholesaler has been criticised for extending credit
too laxly, for setting people up in the retail business who lack
sufficient capital or ability for success. If this is true, why
are the wholesalers so lax? What proposals for improving
conditions can you suggest?
4. Manufacturers of advertised brands often allege that
the quality of goods sold under private brands is inferior to
that sold under nationally advertised brands. They say that
the manufacturers often sell seconds to the wholesalers for
126 Wholesalers
their brands; that the manufacturer of goods sold under
private brands is unknown to the public and hence that he
has no incentive to maintain the quality of his goods; and
that the wholesalers buy on a price basis and must take only
what they can get to sell under their own brands.
On their side, the wholesalers argue that the goods under
their private brands are superior to those under the manu-
facturer's advertised brands. They say that a manufacturer
will at times secure poor goods owing to poor raw materials
or labor troubles, whereas the wholesalers can buy wherever
they can secure goods of the desired quality. They do not
have to buy from any one factory. If one manufacturer's
goods go bad, they buy elsewhere. Also, they can use greater
care in selecting the goods than can large manufacturers who
produce tremendous quantities.
(a) Comment on these arguments.
(b) Name some private brands and some manufacturer's
brands used on similar goods.
(c) Which do you believe to be of superior quality, goods
sold under private brands or nationally advertised brands?
5. The statement has been made that the wholesaler
can be eliminated but that his functions cannot be eliminated.
What does this statement mean? What do you think of its
truth?
CHAPTER 8
Retailing
Functions of retailers. — The retailer is the merchant
who sells goods to the household consumer. His job is
to anticipate the needs of the consumer and to have a
selection of the desired goods in a convenient place at
the time the consumer wants them. In order to do this
he must perform several marketing functions, among
which the more important ones are : selling, storing, buy-
ing, and dividing. Others are risking, financing, trans-
porting, packing, managing, and recording.1
Today we think of selling as one of the chief functions
of the retailer. He displays his goods in his windows
and in his store to attract buyers. He advertises them
in the papers. He employs salesmen to show and ex-
plain the goods to customers.
The retailer stores the goods in locations convenient
to his customers. The places where the retailers con-
duct their businesses are usually called stores, which may
indicate the historical importance of the storage func-
tion.
The retailer must buy goods. It is sometimes said that
he is the purchasing agent for his community. He must
find out what his customers want, negotiate terms of
purchase, and assume title to the goods. The small re-
tailers do little to seek out sources of supply; they usu-
1 The other two, assembling and grading, are minor functions for
most retailers.
127
128 Retailing
ally select their goods from those offered by the whole-
salers. Buying is relatively more important with the
wholesaler while selling is relatively more important
with the retailer. Large retailers often seek out sources
of supply, but in so doing they are really performing a
wholesale function.
The retailer must divide the goods into the quantities
desired by his customers. The word retailer is said to be
derived from a word meaning "to cut again/' that is, to
divide. The retailer weighs and measures goods that
come in bulk and unpacks goods that come in cases, so
that they may be sold by the package.
Risk is involved in carrying goods in stock and in sell-
ing on credit. The retailer not only must finance his
stock of goods but often extends credit to the buyers.
He in turn, however, often receives liberal credit from
the wholesalers, thus reducing the amount of capital
necessary to conduct his business. The wholesaler often
delivers the goods to the retail store; in other cases the
retailer has them delivered by railroads or truckmen.
The retailer often delivers the goods to his customers,
usually packing (or wrapping) them. Records should
be kept of purchases, expenses, and sales, and the busi-
ness must be managed.
Volume of retail business. — The retail stores of the
country made sales totaling 49 billion dollars in 1929 and
25 billion dollars in 1933. The year 1929 was a year
of prosperity, whereas 1933 was a year of severe depres-
sion. Retail business was somewhat above the average
or "normal" in 1929 and considerably below the average
in 1933, the decline in sales being 24 billion dollars. Of
this amount approximately two-thirds was due to a de-
cline in prices and about one-third to a decline in the
quantity of goods sold. The sales of stores selling perish-
Retailing 129
able necessities decreased least. In this group were
variety stores,2 automobile repair shops, and retailers
selling foods, gasoline, drugs, and coal. Most of the de-
cline was in the sales of stores selling durable goods,
such as automobiles, building materials, radios, furniture,
and jewelry. Figures covering the two years are shown
in Table 7.
TABLE 7.— BUSINESS OF RETAIL STORES IN 1929 AND 1933
Per Cent
1929 1933 Decline
Number of stores 1,543,158 1,526,119 —0.5
Total sales (in thousands) $49,114,653 $25,037,225 -^9
Total number workers 5,913,547 5,008,093 —15
Average salary per full time
employee $1,312 $986 —25
Per cent of sales made on
credit 34 28
Expense of doing business,
per cent of sales* 24.8 29.4
* Includes imputed wage for proprietors at rate paid employees.
The total volume of sales made by retail stores is not
the same as the total quantity of goods sold at retail.
Eetailers make some sales at wholesale, and wholesalers
make some sales at retail. Some retailers also receive
money for such services as repairing and storing mer-
chandise. Many producers, such as publishers, manu-
facturers, miners, and farmers, sell direct to the
consumers. We may estimate that the total volume of
goods sold at retail amounted to more than 52 billion
dollars in 1929 and more than 27 billion dollars in 1933.8
2 The sales of variety stores, commonly called "five and ten cent
stores," decreased less than the average, presumably because people
economized by buying cheaper goods, and because lower prices brought
a greater variety of goods within the price range of these stores.
3 Retail sales made by wholesalers amounted to 586 million dollars
in 1933, while wholesale sales by retailers were 462 million dollars.
Sales of services by retailers were 568 million dollars in this year. Di-
130 Retailing
The volume of retail sales has been increasing since
1933.
Sales on credit totaled 17 billion dollars in 1929 and
7 billion dollars in 1933. One-half of the stores extend
credit, and about one-half of their sales are made on
credit and one-half for cash.
Types of retailers. — There are many types of retailers:
the corner grocer, the huge department store, the mail-
order house, the news stand, the filling station, the coal
yard, the milk distributor, the restaurant, and the re-
freshment stand are all retailers. Retailers may be
classified in many ways, the most usual grouping being
according to the type of goods sold. The number of
stores, with their total sales and expenses for the more
important types of goods, is shown in Table 8.
Food is easily the most important commodity sold by
retailers, accounting for fully one-third of the total sales
in 1933. In addition to that sold in food stores, large
quantities of food are sold by country general stores, drug
stores, department stores, and variety stores. The sale
of automobiles, gasoline, oil, tires, accessories, and re-
pairs is second in importance, accounting for more than
one-sixth of the total sales in 1933. The proportion is
larger in prosperous years. Clothing is sold not only by
rect sales made to consumers by farmers, publishers, manufacturers,
and coal mines must run into the billions. The Census missed sales
of illegal products and sales by retailers who were out of business
when the Census was taken. It covers only sales made by concerns
with established places of business, and hence apparently missed the
sales made by many house-to-house salesmen, farmers, roadside stands,
and newsboys.
All goods sold at retail are not consumption goods. Industrial
goods sold by retailers include motor trucks, gasoline and oil for
business vehicles, and automobiles used for business purposes; farm
equipment; office supplies; and artisan's tools.
The Census figures include meals sold by restaurants and hotels
but not by boarding houses, clubs, labor camps, and so forth.
Retailing
131
TABLE 8.— SALES OF VARIOUS TYPES OF RETAIL STORES, 1933
Vol. of Sales Per Cent oj
No. of Stores (thousands) Total Sales
163,538 $1,803,242 7.2
140,372 3,201,042 12.8
38,344 491,866 2.0
170,434 1,324,387 5.3
29,901 105,551 0.4
121,662 1,296,860 5.1
674,251 8,222,948 32.8
30,646 2,127,720 8.5
170,404 1,531,724 6.1
86,454 519,827 2.1
17,899 239,978 1.0
305,403 4,419,249 17.7
86,548 1,923,333 7.7
85,839 1,097,437 4.4
34,122 668,145 2.7
3,544 2,544,960 10.2
12,046 678,167 2.7
135,551 4,988,709 20.0
42,976 958,780 3.8
43,296 854,219 3.4
54,446 951,830 3.8
23,875 623,077 2.5
58,407 1,066,252 4.2
20,869 105,275 0.4
80,497 923,553 3.7
1,526,119 $25,037,225 100.0
Type of Store
Food:
Grocery
Grocery and meat
Meat
Restaurants
Drinking places
Other
Total
Automotive :
Vehicle dealers
Filling stations
Repair garages and shops .
Accessories and other ....
Total
Apparel /
General :
Country general
Gen. mdse and dry goods .
Department
Variety (5# to $1)
Total
Furniture and furnishings . . .
Building materials . .
Hardware, farm implements,
and supplies
Coal, wood, and ice
Drug
Second hand
Other
ALL.
apparel stores but by department, dry goods, general,
and variety stores. One-sixth of the sales of retail stores
in 1933 consisted of various kinds of clothing. Clothing
apparently took more of the consumer's dollar than
automobiles, since a considerable part of the trucks,
automobiles, and gasoline are used for business purposes
and not for personal consumption. Other important
types of goods sold at retail are furniture and home fur-
nishings; building materials; farm equipment and sup-
132
Retailing
plies; hardware; coal; ice; drugs; tobacco; and jewelry.
Basis of operation. — Retail stores are often classified
according to ownership or method of operation. Inde-
pendent stores usually consist of single stores operated
by their owners. Chains consist of several stores under
one ownership and management. Direct sellers are those
who send salesmen from house to house rather than have
the consumers come to their places of business; mail-
order houses solicit business by mail. Commissaries are
stores operated by industrial companies, such as mines,
mills, or factories, primarily to sell goods to their em-
ployees. Many public utilities, such as gas and electric
companies, operate stores primarily to promote the sale
of gas and electricity by the sale of appliances using
these products. The number of such stores and their
sales, for 1929 and 1933, are shown in Table 9. It will
be seen that the chains and direct sellers increased their
proportion of the business between 1929 and 1933. In
the case of direct sellers, the increase may have been due
TABLE 9.— SALES OF RETAIL STORES OPERATED IN
DIFFERENT WAYS
Type of
Organization
Number of Stores
SALES
1929
1933
Volume
(millions)
%of
Total
Volume
(millions)
%of
Total
1929
1933
Independents .
Chains . .
Direct selling .
Mail order ....
Commissaries .
Public utility
stores
1,375,509
148,037
1,661
271
1,347
4,053
12,280
1,349,337
141,603
7,026
311
2,719
4,127
20,996
$38,082
9,835
94
515
116
163
310
77.5
20.0
0.2
1.0
0.3
0.3
0.7
$17,827
6,313
187
244
96
76
294
71.2
25.2
0.7
1.0
0.4
0.3
1.2
Other types. . .
Retailing 133
to a more complete coverage by the Census in the latter
year.
Location. — Stores may be grouped for study on the
basis of location, for stores in different types of locations
have certain problems in common. The more important
types of locations are: rural stores, located at country
crossroads, in villages, and in small towns; trading center
stores, located in the county seats and smaller cities scat-
tered throughout the country; shopping center stores,
located in the shopping districts of the larger cities;
neighborhood stores, situated in the smaller business dis-
tricts and residential areas of cities; and suburban stores,
operating in suburban towns adjacent to larger cities.
Integrated and non-integrated stores. — Integrated
stores are those which perform both the wholesale and
the retail functions. Large stores, such as department,
chain, and the larger specialty stores, are often large
enough to buy from manufacturers direct and perform
the wholesale functions of buying, storing, and financing
in addition to their retail functions.
Basis of study. — The next chapter will be devoted to a
study of independent stores, which will be classified on
the basis of their location. Following this we shall take
up department stores, mail-order houses, chain stores,
and the efforts of the independent stores to compete with
the large integrated stores.
Expenses. — The average expenses of all retail stores
was reported by the Census as 24.8 per cent of sales in
1929 and 29.4 per cent of sales in 1933. The higher ex-
pense ratio in 1933 was caused by the fact that during
periods of depression and falling prices sales decline faster
than expenses. Sales fell off 49 per cent during these
four years, while payroll declined 42 per cent, owing to a
reduction in the number of employees and wages paid,
134 Retailing
and other expenses declined 31 per cent. It is usually
true in periods of changing prices that the prices of
commodities change more rapidly than wages, rents, and
the rates for advertising, electricity, gas, water, tele-
phones, and transportation. Such items make up most of
the dealer's expenses. Thus in periods of rising prices,
the dealer's percentage of expense usually declines, while
in periods of falling prices his expense percentage usually
rises. When the volume of sales changes quickly, owing
to a change in purchasing power, there is a similar lag in
expenses. The dealer's profits usually increase during a
period of rising prices and decrease during a period of
falling prices. The expenses of retailers were abnormally
high in 1933.
Reasons for variations in expenses. — The expenses of
individual retail stores vary with the efficiency with
which they are operated. Average expenses vary with
the location and the type of goods handled. The ex-
penses of retail stores (as measured in percentages) in-
crease with the size of the towns in which the stores are
located. This increase is due to higher wages and to
higher percentage costs for rent, advertising, and de-
livery in the larger towns.
Average expenses vary with the type of goods sold,
owing to the shopping habits of the consumers; the value
of the units in which goods are sold; the regularity of
sales; and the locations of the stores. The expenses of
country general stores are low largely because of their
location. The expenses of grocery stores are low because
people do little shopping around for groceries, and when
they enter a store, they usually make a purchase; be-
cause grocery stores have fairly regular sales throughout
the year; and because many of them are located in small
towns and residential districts. Automobile dealers have
Retailing 135
fairly low expenses because of the large units in which
their products are sold. Clothing stores sell in mod-
erately large units but have fairly high expense owing to
their irregular sales and to the shopping habits of the
buyers; the salesmen must show goods to many people
who do not buy. Jewelry stores have high expenses be-
cause of irregular sales, shopping habits, and expensive
locations. A very large part of the jewelry is sold in
December for Christmas gifts. Furniture stores sell in
large units but have irregular sales, and the consumers
TABLE 10.— EXPENSES OF OPERATING RETAIL STORES
Operating Expenses*
Type of Store (Percentages of Sale^
1929 1933
Grocery 17.4 20.0
Grocery and meat 16.1 19.9
Meat 19.6 27.5
Milk and dairy products 37.4 39.7
Restaurants 40.0 44.9
Country general 13.6 17.0
Variety 25.0 28.9
Dry goods and gen. mdse 22.5 26.1
\utomobile dealers 17.8 21.2
Filling stations 23.8 27.4
hardware 22.8 29.2
Tobacco 31.4 27.6
Department 28.4 32.7
Women's clothing 29.1 32.1
Wen's clothing 28.9 34.3
Shoes 29.4 32.4
Drug 27.1 30.9
Lumber 21.8 31.0
Uoal and ice 24.8 30.8
Furniture 31.1 40.7
Fewelry 35.5 47.9
AVERAGE ALL TYPES 24.8 29.4
*Includes salaries for the owners active in the busi-
less at the average rate paid to full-time employees,
n 1933 for stores with sales under $10,000, salaries for
woprietors were included as those for full-time em-
ployees only in the proportion that actual sales bore
,o $10,000. Thus, if sales were $5,000 only, one-half
>f the average salary was included for the proprietor.
136 Retailing
shop extensively. The drug store has fairly high ex-
penses, owing to small average sales and often to down-
town locations.
The expenses of various types of stores are shown in
Table 10. The average expense figures cover stores lo-
TABLE 11.— RELATION OF RETAIL EXPENSES
TO SIZE OF TOWN
(Illinois, 1929)
Town Size Average Expenses
(Percentage
of Sales)
Under 10,000 20.8
10,000- 30,000 24.4
30,000-100,000 25.5
30,000-100,000 (suburban) 26.8
Chicago (3,376,438) 29.3
TABLE 12.— EXPENSES OF RETAIL CLOTHING STORES
ACCORDING TO SIZE OF TOWN*
Town Size Number of Average Expenses
Stores (Percentage
of Saks)
Under 10,000 471 18.0
10,000- 20,000 141 20.8
20,000- 40,000 139 21.9
40,000-120,000 136 24.5
120,000-200,000 44 26.3
200,000-440,000 34 , 24.3
440,000 and over 30 31.5
TOTAL AND AVERAGE 995 22.7
*Figures from Northwestern University Bureau of Business
Research for the years 1914, 1918, and 1919 combined.
TABLE 13.— EXPENSES OF RETAIL HARDWARE STORES WITH
SALES OF $25,000 TO $40,000, ACCORDING TO
SIZE OF TOWN, 1934.
Population of Percentage of
Town Expense
Under 1,000 22.4
1,000- 3,500 24.5
3,500-10,000 27.4
10,000-50,000 29.0
50,000 and over 31.6
Retailing 137
cated in all sizes of towns. Various types of stores in
small towns have expenses which are usually 2 to 4 per
cent lower than the average for the entire country, while
those in large cities will have expenses which are 1 to 4
per cent above the average. (Coal ahd ice dealers fur-
nish an exception to this statement.) This difference
means that the city stores must charge higher prices, or
they must buy their goods more cheaply if they are to
sell as cheaply as the country stores.
Size of stores. — Retailing has been traditionally a
small-scale industry. Most retail stores have been small
and have been operated by their owners with only the
assistance of members of their families or a few hired
employees. Improvement in transportation facilities and
in the art of management has, however, made possible
the growth of large stores. Improved railroad and mail
facilities have made possible the development of large
stores selling over wide areas by mail. The growth of
large cities and the development of street car, subway,
and suburban train service have produced large depart-
ment and specialty stores in the shopping districts.
More recently, chains have grown rapidly by operating a
number of stores in locations convenient to the con-
sumers. Large stores have increased in size until stores
with sales of over $1,000,000 do 10 per cent of the total
business and stores with sales of over $100,000 do about
one-fourth of the total business. If chains are included
as large stores, then large stores may be said to do more
than one-third of the total retail business.
In 1933, nearly two-thirds of the retail stores of the
country had sales of less than $10,000. These stores,
however, did only 14 per cent of the total business. Poor
business and low prices in 1933, however, reduced the
sales volume of most stores so that the number of stores
138 Retailing
with small sales was greatly increased. For this reason
1933 conditions can scarcely be taken as normal. The
number of stores of various sizes, together with their
sales, are shown for 1929 in Table 14. - 1
TABLE 14.— NUMBER AND SALES OF RETAIL STORES
ACCORDING TO SIZE, 1929*
Number of % of Total Sales Volume % of Total
Stores Number Sales
419,378 27.2 Under $5,000 2.0
254,308 16.5 $5,000- 10,000 3.7
312,865 20.3 10,000- 19,999 9.0
173,458 11.2 20,000- 29,999 8.6
176,767 11.4 30,000- 49,999 13.7
128,869 8.4 50,000- 99,999 17.8
49,497 3.2 100,000- 199,999 13.7
12,966 0.8 200,000- 299,999 6.4
8,467 .... 0.6 300,000- 499,999 6.5
4,524 0.3 500,000- 999,999 6.3
2,059 0.1 1,000,000 and more 12.3
1,543,158. 100.0 100.0
* Each store in a chain considered as a separate store.
Operation of very small stores. — A store with sales of
$5,000 a year has sales of only $16 a day.4 A lunch stand
with a margin of 40 per cent has a daily average margin
of $6.40, while a grocery with a 20 per cent margin has
only $3.20 per day out of which to pay expenses and
profits. Out of this margin the retailer must pay for
rent, fuel, light, wrapping materials, taxes and licenses,
advertising, delivery, and interest, and he must also take
his own wages. Some of these small retailers may do
little or no advertising, borrow no money, and make no
deliveries. Even when this is the case, their margin
leaves very little for their own time after they pay other
expenses. It has generally been supposed that one man
4 In 1933 in many states more than one-third of the stores had less
than this volume of sales.
Retailing
139
should sell at least $10,000 worth of goods per year in a
retail store. The sales vary according to types of mer-
chandise and the price level. In 1929, two out of every
five retail stores had sales of less than $10,000. and one
Courtesy The Red Barrel.
Fig. 10. — The wife helps run the store. In stores with sales of
less than $10,000 a year, members of the family often do much of
the selling in conjunction with other work. Something like one-half
of the retail stores have sales of less than $10,000.
of every four stores had sales of less than $5,000. If
$10,000 is the minimum sales volume for an efficient use
of the time of one man, we may infer that all of these
small stores are inefficient and should be put out of busi-
ness.5 This conclusion does not necessarily follow. Some
5 The average sales per full-time employee in all types of retail
stores were approximately $9,000 in 1929 and $5,600 in 1933. The
average is reduced by the inclusion of restaurants and other establish-
ments using labor in preparing or repairing goods. Averages for various
types of stores are shown in Chapter 22. The figure of $10,000
given as the average minimum amount of goods that a man should
sell in most types of retail stores is based on prices prevailing between
1915 and 1931. If prices remain substantially below those prevailing
during this period, the figure will have to be changed.
140 Retailing
of these small stores are so located that they are a real
convenience to their customers, as, for example, a coun-
try filling station, a village drug store, or a lobby news
stand. Some are operated by persons who perform other
services in addition to selling goods, such as cooking
foods, repairing watches, tires, clothing, automobiles,
electrical appliances, and shoes, and plumbing; and some
make hats or clothing. Many of these small stores are
conducted in homes and much of the selling is done by
the wife or children while the husband is at other work.
Many are operated by people who would otherwise be
unemployed. Some are operated by people too old to
hold strenuous jobs. In fact, a great many of the small
stores are started by people who are out of work and
have nothing else to do. Such people seldom have train-
ing or experience that fits them for retail business. How-
ever, if these people cannot be given other work, it may
be better to have them engaged in retailing than to be
on public relief or charity.
Many small stores are inefficient and should be closed
if retailing is to be conducted more efficiently. We hear
many demands that the cost of distributing goods be
reduced. Large organizations, such as chain stores, often
reduce distribution costs through integration, large-scale
buying, and efficiency of operation. On the other hand,
we hear many demands that the growth of large retail
organizations be stopped in order to protect the small
dealers and to give our young men an opportunity to
establish their own businesses. Some states have im-
posed high taxes on chain stores to restrict their growth.
Here is a definite conflict of opinion. Should large or-
ganizations that are able to sell goods somewhat more
cheaply be handicapped in order to allow men with small
capital and limited training to operate stores? There is
much to say on each side of the question.
Retailing 141
Chapter 8
Review Questions
1. What are the principal retail functions?
2. Name the less important retail functions.
3. Which is more important in retailing, buying or sell-
ing? Why?
4. What was the volume of business done by our retail
stores in 1929? 1933?
5. What is the difference between volume of sales of retail
stores and total volume of goods sold at retail?
6. What is the relative importance of each of the following
items in our retail trade: clothing; automobiles; building
materials and supplies; household furniture and furnishings;
food?
7. What are the principal types of retail stores? What
can you say of the relative importance of stores operated on
different bases?
8. Why did expenses of retailers increase between 1929
and 1933?
9. Are retail expenses higher in large cities or small towns?
Why?
10. Why do the expenses of different types of stores vary?
11. Why has retailing been a small-scale industry?
12. How do you explain the growth of large retail stores
in the United States?
13. How do you explain the existence of so many small
retail stores?
Thought Problems
1. What were the per capita retail sales in 1929 and 1933?
2. The Census figures show a lower per capita retail busi-
ness in the rural districts (and states) than in the large cities.
142 Retailing
Does this mean that the rural population has a lower stand-
ard of living?
3. The Census figures show that many of the smaller
cities have a higher per capita retail business than the large
cities. Does this mean that the smaller cities enjoy a higher
standard of living? What other explanations can you offer?
4. The Census figures show that the college and university
towns often have a high per capita retail trade. Why?
5. Assuming that large stores can sell goods somewhat
more cheaply than small stores, should large stores be ham-
pered by high taxes and other forms of restrictive legislation?
CHAPTER 9
Independent Stores
The independent store. — Most independent stores are
small non-integrated concerns that perform only the re-
tail functions and buy their goods from wholesalers and
from integrated manufacturers who perform the whole-
sale functions. The small general and specialty stores
are the typical non-integrated retailers. They are called
independent, unit, and individual stores.
The independent store is usually a small store owned
and operated by a proprietor or by two or three partners.
Independent stores may be classified according to their
location or according to the type of goods handled. We
are, perhaps, most accustomed to think of stores accord-
ing to the class of goods handled; for example, grocery
stores, drug stores, hardware stores, clothing stores, and
so forth. For our purposes, however, location appears to
offer a more logical and practical classification and will
be used in this chapter.
Common problems of small stores. — Regardless of
their location, the independent stores have many prob-
lems in common. They have small buying power, which
means that they must sometimes pay more for their mer-
chandise than the large stores. On the other hand, they
do not incur the expenses of operating wholesale depart-
ments.
The independent retailer ordinarily has a location more
convenient to his customers than his large competitors.
The crossroads, village, small town, and neighborhood
143
144 Independent Stores
city stores are closer to the consumers than are most other
stores. The small down-town stores are usually located
on the street levels where the merchandise can be easily
reached by passers-by. Such stores may be on corners,
near railway stations, in office buildings, or in other
places where they are convenient to the consumers.
The independent merchant usually has a closer per-
sonal contact with his customers than do the large stores.
The rural merchant knows his customers intimately and
calls them by name. The neighborhood merchant in the
city likewise knows many of his customers and is familiar
with their wants.
The independent store is ordinarily too small to em-
ploy specialists or experts to handle its buying, window
display, stock display, lighting, advertising, accounting,
credit extension, collecting, and training of employees.
The owner must ordinarily look after all of these mat-
ters, and frequently they are not as well done as in a
large store that can employ a staff of specialists to look
after different parts of the business. For example, the
small store usually has a higher percentage of bad debt
losses on credit sales than the large store that employs a
credit manager.
The small store does not usually have as detailed a
system of accounting and stockkeeping as the large store.
This proves to be a handicap in analysing its operations
and in selecting its purchases. On the other hand, it does
not have the cost of keeping elaborate records, nor of
employing a staff of high-priced specialists.
Rural and city markets. — The population and retail
business of the country is distributed as shown in Table
15. The Census reported practically no shift in the pro-
portion of stores and sales in cities of different sizes from
1929 to 1933.
Independent Stores 145
TABLE 15.— BUSINESS OF RETAIL STORES BY
LOCATION, 1933
Size of Town
Per Cent
Per Cent
Per Cent
(Population)
of Total
of Total
of Total
Population
Stores
Sales
Over 500,000..
17.0
19
26
100,000-500,000 .
. . 12.6
14
20
10,000-100,000.
. . 18.0
21
24
2,500- 10,000.
8.6
13
12
Under 2,500..
43.8
33
18
It will be noted from the figures in the table that towns
of over 2,500 population do a larger retail business in
proportion to their population than smaller places. In
one Census study it was shown that in 61 per cent of the
counties the county seat towns did over one-half of the
retail business. The importance of the towns in this
group as trading centers is indicated by the fact that 80
per cent of the counties have no town as large as 10,000
population. Communities under 2,500 include the coun-
try's farms and do a relatively small retail business in
proportion to population. This can be explained largely
by two facts — the people in this area go to larger towns
to do much of their buying, and many of the people liv-
ing in this area are farmers who raise much of their food
and fuel. In 1929 there were 694,536 retail stores in
places of less than 10,000 population, with total sales of
nearly 15 billion dollars. This number was 45 per cent
of the total number of stores in the entire country, and
these stores did 30 per cent of the total retail business.
Location. — The independent stores may be located at
a country crossroad; in an agricultural, lumbering, or
mining village; on the main street of a small town; in
the shopping district of a city; in the residential neigh-
borhood of a city ; or in a suburban town.
Rural stores. — Rural stores consist of specialty,
multiple-line, and general stores located in villages and
146 Independent Stores
on country roads. Many rural stores handle only one
line of goods, such as groceries, hardware, building ma-
terials, or clothing; many handle groceries and a stock of
miscellaneous (variety) goods. Many handle two or
more lines of goods, for example: hardware and groceries;
clothing, dry goods, and hardware; groceries and shoes;
building materials, coal, and farm equipment. Others
are general stores in that they handle a great variety of
goods. Many rural stores attempt to handle all kinds
of goods to meet the daily needs of their customers. A
typical general store carries such goods as groceries,
shoes, work clothing, underwear, hats, hosiery, hardware,
stoves, seeds, tools, and some of the articles of farm and
household equipment.
The Census reported some 100,000 general and mul-
tiple-line stores in 1929, located in towns of less than
10,000 population. These stores had sales of about 2
billion dollars, which was 4 per cent of the total sales
of all retail stores. Other types of stores that are espe-
cially important in rural districts are those handling
feed, farm supplies, farm implements, hardware, lumber,
and gasoline.
In addition to selling goods, many rural stores are im-
portant in assembling such farm products as eggs, poul-
try, cream, and cotton. Many rural stores do from
one-fourth to one-half of their total business in assem-
bling farm products which are shipped to other markets.
The rural store of today has to meet conditions quite
different from those prevailing when the country was
being settled. The United States was settled under a
geography determined by horse, water, and rail transpor-
tation. County seats were located every 20 or 30 miles
so that a man could visit the courthouse and return home
the same day by horse. The county seats usually de-
Independent Stores
147
veloped into trading centers. Between the county seats
villages were established every four to eight miles, serv-
ing as assembling points for farm products and as supply
depots at which the farmers could buy their convenience
goods and farm supplies. Some of these grew into trad-
ing centers. .
< o/uN.v// i tie Jfrogresaive Urocer.
Fig. 11. — Store front of a modern general store. Note the open
windows (no backs), the interior of the store being visible from the
sidewalk.
For about two decades after the railroads were built,
the farmers bought their convenience goods and some of
their shopping goods at the village stores. Other shop-
ping goods were bought on periodic visits to the county
seats and on occasional visits to larger cities. Then came
the mail-order house with its greater variety of goods
and, in many instances, lower prices. The mail-order
houses took much business away from the rural stores,
and forced them to reduce their prices and carry wider
assortments of goods to hold their trade. After two
decades of competition between the rural store and the
mail-order house, the automobile came into general use
and increased the number of competitors.
148 Independent Stores
The use of automobiles and the building of surfaced
roads have enabled the farmers to visit the larger towns
more frequently. The stores in these towns have larger
stocks. Many cash-carry chain stores with low prices
are found in these towns, and many of the independent
stores advertise low-priced specials which appeal to the
farmers. In some parts of the country there has been an
increase in farm tenancy, while some parts have had a
decline in rural population; these changes have caused
a decline in the demand for many kinds of goods.
Advantages of rural stores. — The rural stores have
several advantages. They are closer to their customers
than any of their competitors. It takes more gasoline
for their customers to visit the trading center stores.
They have low operating expenses. The cost of living,
the wage scale, and the cost of rent are low in the rural
districts. Total expenses are often from 13 to 18 per
cent of sales.1 The rural stores, likewise, usually have
little or no cost for delivering goods to the buyers. The
rural dealer has a personal acquaintanceship with his
customers, and he often extends credit to them. He
generally claims to have lower selling prices than the
stores in the larger towns because of his lower operating
expenses.
Disadvantages of the rural stores. — The greatest dis-
advantage of the rural store is its limited variety of
goods. Travel by automobiles, fashion magazines, mov-
ing pictures, the radio, and advertisements in the news-
papers enable the rural population to obtain the latest
style news. There is less difference in the fashions of
clothing, household furnishings, and mechanical appli-
1 It should be remembered that rural stores sell largely convenience
goods, farm equipment, and feed, which involve lower expenses than
does the sale of shopping goods.
Independent Stores 149
ances between the city and country population than ever
before. Many rural buyers want the popular styles, and
if the rural stores do not have these goods, the automobile
enables them to go to the larger towns for them. The
rural dealer can partially overcome this handicap by buy-
ing small quantities of each article and re-ordering fre-
quently, and by ordering from catalogs when customers
want articles that are not in stock.
The larger towns have many attractions, such as
amusements, legal and medical services, banking facil-
ities, barber shops and beauty parlors, schools, hospitals,
and repair shops for different types of goods. When
people come to a town primarily for such services, they
often buy goods.
The rural dealer often lacks a newspaper that is a
satisfactory advertising medium. To advertise in the
county seat papers often involves a waste of circulation
and unnecessary expense. However, if no satisfactory
local paper is available, the merchant can advertise by
direct mail or by outdoor signs. A store paper (house
organ) carrying news of the neighborhood and the goods
offered for sale can be used effectively. Many rural
stores, however, fail to advertise consistently.
Much business is lost by the rural dealers because of
indifference, dirty stores, poorly displayed goods, too
liberal extension of credit, failure to collect accounts, and
poor advertising. These are results of the dealer's in-
efficiency. Perhaps more sales are lost for these reasons
than from inherent handicaps in the business.
Shopping and convenience goods. — That farmers usu-
ally go farther to purchase shopping goods than con-
venience goods is illustrated by a study made in Illinois
in 1935. Shopping goods, it will be recalled, are goods
of relatively large value to the purchase of which the
150 Independent Stores
consumers attach considerable importance, while con-
venience goods are usually smaller staple articles which
are bought frequently.
TABLE 16.— AVERAGE NUMBER OF MILES TRAVELED BY
FARMERS TO PURCHASE DIFFERENT TYPES OF GOODS
(Illinois, 1935)
SHOPPING GOODS CONVENIENCE AND BULK GOODS
Commodity M^ Commodity M?^
Women's dresses & coats . 15 Drugs & toilet articles .... 5
Furniture 12 Fresh meat 5
Women's shoes 10 Groceries 5
House furnishings 9 Hardware 5
Women's other clothing . 9 Gasoline and oil 4
Dry goods 8 Feed (largely from local
Men's shoes 8 elevators) 4
Men's furnishings 7 Lumber & building
Men's suits & overcoats 6 materials 3
Men's work clothing 6
There is a marked distinction between such shopping
goods as women's clothing and furniture, on one side,
and such convenience goods as groceries and feed, on the
other. On the other hand, men's furnishings and work
clothing are close to the borderline between shopping
and convenience goods.2
Conclusions on rural stores. — The automobile and the
surfaced road increase the opportunity of the rural dealer,
for it makes it possible for him lo draw trade from a
wider radius.3 Many wide-awake dealers have taken ad-
vantage of better transportation facilities and low operat-
ing expenses and increased sales by properly assorted
and displayed stocks of goods, plus good salesmanship
and advertising. Some have sales of more than a hun-
dred thousand dollars a year and a few have been re-
2 Distances are greater in more sparsely populated areas.
3 Some rural stores draw trade from neighboring cities by their lower
prices on manufactured goods and by the sale of fresh country produce.
Independent Stores
151
ported with annual sales of more than a million dollars.
Such large rural stores are, however, the exception.
Generally speaking, the business of rural stores has been
declining. Trade is being concentrated in larger towns,
especially the county seats.
Trading center stores. — Trading centers are towns
that draw trade from surrounding territories and are
Courtesy The Farmer.
Fig. 12. — Retail stores in a trading center.
large enough to enable their merchants to handle fairly
complete lines of shopping goods. A trading center may
vary in size all the way from one or two thousand people
(perhaps less in some of the more sparsely populated
districts) up to a city of 100,000 or more population.
Trading center stores are able to carry more complete
stocks of goods than the rural stores. The larger stocks
of goods and the services and amusements available draw
people to the trading centers. The stores advertise in
152 Independent Stores
the local papers, which often cover their entire trade
territory, and many of the stores use "specials" or "lead-
ers" that they advertise at low prices. The trading cen-
ter merchant has an excellent opportunity to make
acquaintances with his customers and to study their
needs. Trading center stores draw trade away from the
rural stores but lose trade to the stores in the larger
cities.
The trading center merchant has to pay higher wages
and higher rent than the rural merchant, and he is lo-
cated at a greater distance from his rural customers.
These factors give the rural merchant the advantage in
many sales. After all is said, it is more convenient to
buy near home. If the farmer sells his grain, livestock,
milk, potatoes, or cotton at the nearby village, the trip
to the trading center is an extra trip. Most trading cen-
ters are handicapped by limited parking space, especially
on Saturday evenings.
Down-town city stores. — Independent down-town
stores are located in the high rent districts. As the
amount paid for rent usually increases faster than the
volume of sales, these stores have a higher percentage
expense for rent than stores located in the smaller towns
and cities. Very commonly such stores are located on
the street level and do not use other floors. This means
that they must pay first floor rent for all of their space.
The large store, on the other hand, often uses several
floors for selling and therefore utilizes some lower priced
space. Some small stores are located on second floors or
in basements, but in such cases they may have to do
a large amount of advertising to secure customers.
It will be noted from the figures in Table 17 that re-
tail salaries increased much faster than the sales made
by each employee. From the small villages to Chicago
Independent Stores
153
TABLE 17.— SALARIES AND SALES IN RETAIL STORES
LOCATED IN TOWNS OF DIFFERENT SIZES
(Illinois, 1929)
Size of Town
Average Salary
Average Sales
Average Sales
(Population)
Per Full-Time
Per Full-Time
Per Store
Employee
Employee
Under 1,000 . . .
$1,116
$8,074
$15,007
1,000- 3,000 . . .
1,168
8,735
21,717
3,000- 5,000 . . .
1,247
9,431
27,647
5,000- 10,000 . ..
1,335
9,579
31,912
10,000- 30,000 .
1,309
9,224
36,583
30,000-100,000 (non-
suburban) ... .
1,292
9,028
43,370
30,000-100,000
(suburban)
1,587
10,068
40,786
Chicago (3,376,438) .
1,552
9,598
48,823
the average salary increased 39 per cent, while the aver-
age sales produced by each employee increased only 19
per cent. Between towns of 5,000 and Chicago, salaries
increased 20 per cent, while sales per person increased
only 2 per cent.
Degree of specialization. — The large number of people
in down-town districts furnishes enough buyers for dif-
ferent products to make possible a high degree of
specialization. We find stores handling only one kind of
goods, such as candy, jewelry, men's hats, luggage, pets,
oriental goods, periodicals, gift goods, books, tobacco,
rugs, shoes, women's hats, sporting goods, office supplies,
and toys. Such stores may also handle only one grade of
such goods as popular priced candy or expensive hats.
A high degree of specialization enables such stores to
carry wider or more complete assortments of goods than
stores carrying more kinds of merchandise. The shoe
store catering to only one class of trade may thus carry
shoes in a variety of materials and styles to fit all shapes
and sizes of feet. It thus attracts customers who want
distinctive styles or who have trouble in buying comfort-
154
Independent Stores
able shoes in less specialized stores. A large assortment
of goods attracts customers who feel that they can find
exactly what they want, can make selections from large
stocks, or can obtain distinctive goods.
Courtexy The Progressive Grocer.
Fig. 13. — Interior of a modern general store. Note the low
fixtures, the absence of counters, and the display of goods in such
fashion that they may be easily seen and inspected by the customers,
All down-town stores do not, however, specialize
within a narrow field, nor do they all carry complete
stocks. Some, like the drug stores, attempt to handle
almost any type of small goods which sell rapidly. Others
carry only the fast-selling items and try to make a profit
by a large volume of sales and a rapid rate of stock
turnover.
Competitors. — The main competitors of the small
down-town stores are the large department and specialty
stores located in the shormine? districts and thp. srrmllpr
Independent Stores
155
Court t*i/ The Proffrestive Grocer.
Fig. 14. — Diagram of the interior of a small modern grocery
store. Note the open displays and the absence of counters. The
scales and cash register are placed in the rear to draw customers to
the back of the store so that they will have the opportunity to see
and buy goods from the open displays. The width of the building
allows only one display window, which is of the open type. Tables F
are for special displays — goods on special sale or goods which the
grocer is making a special effort to move.
156 Independent Stores
stores located in the suburbs and residential neighbor-
hoods.
Advantages. — An advantage of the small down-town
stores in contrast with large down-town stores is their
greater convenience. The small stores are usually lo-
cated on the street level and the goods are much more
accessible than those in the large stores. This is espe-
cially important with convenience goods such as news-
papers, magazines, cigarettes, candy, and soda fountain
drinks and lunches. The ease of entrance is said to be of
greater importance with men than with women.
Some of the small stores maintain an exclusive at-
mosphere which is impossible for the large store patron-
ized by the masses. The small store also often has a
more friendly atmosphere than the large store. Many
people like to be served by the owner of a business, who
is generally on the floor acting as a salesman, at least
part of the time. As the other salesmen work under his
immediate supervision, the small store often has a better
quality of salesmanship than the larger stores.
Disadvantages. — The small store cannot employ
expert specialists as can its large competitors. It cannot
advertise so advantageously, for it cannot afford the large
space in the city papers and it cannot afford an expert
advertising manager. It does not have the reputation
that is often obtained by a large store. Nor is it able to
offer the consumer all kinds of goods as does the depart-
ment store. It is handicapped in rendering credit service,
for it cannot afford a complete credit department. It
may not be able to buy as cheaply as the large store, and
it does not usually have specialized buyers to scour the
world for new and distinctive goods.
Neighborhood and suburban stores. — Neighborhood
and suburban stores in many ways occupy positions mid-
Independent Stores 157
way between the small town stores and city stores in the
shopping districts. They have higher wage scales than
the small town stores. They have a closer personal ac-
quaintanceship with their customers than the down-town
stores but not as close a touch as the rural stores. They
are located closer to their customers than the down-town
stores, but they do not carry the same wide variety of
goods. They lack many attractions found in the shop-
ping districts. The large number of stores, the variety
of goods, the brilliant show windows, the theaters, the
restaurants, and the crowds are attractive to many and
draw people to down-town stores when they could obtain
the goods at the same or lower prices at stores near their
homes. The neighborhood and suburban stores thus
have the same complaint against the down-town stores
as do the rural stores against the stores located in the
trading centers.
Automobile trade. — One distinct advantage of the
neighborhood stores is the greater ease of parking in
nearby streets. Traffic congestion and limited parking
space keep many people away from down-town stores
and help the suburban stores. Many of the large down-
town stores have opened branch stores in the suburbs,
perhaps realizing that it is difficult to draw any more
trade into the congested down-town districts.
Special types of stores have also grown up to sell to
the motorists. Among these are roadside stands, street-
side markets, drive-in markets, groups of stores built
around a parking space into which customers may drive
and park, and large food markets located outside busi-
ness districts. The thousands of roadside stands along
our automobile highways sell gasoline, oil, tires, meals,
sandwiches, candy, drinks, groceries, novelties, drug
sundries, and antiques.
158 Independent Stores
Vending machines. — There are thousands of machines
throughout the country selling various kinds of articles —
from chewing gum, candy bars, and cigarettes to gaso-
line, spark plugs, and handkerchiefs. When properly
placed, such machines may be a convenience to the con-
sumers and a source of profit to their operators.
Self-service stores. — Many stores handling staple mer-
chandise place the goods on open shelves and tables and
allow the customers to select their own goods. This
method eliminates salesmen and saves their salaries.
The self-service method is used by both independent
and chain stores. This method is popular with many
people who like to select their own goods, entirely free
from any pressure from salesmen.
The principal advantage of the self-service method is
that it saves sales force expense, which often amounts
to from 5 to 8 per cent of sales. In the place of sales-
men, however, stockmen, checkers, and cashiers are
required. The number of persons required is, however,
much less, so that a net saving is realized.
The self-service method also enables the dealer to
increase the volume of business done in a given building.
This results in reducing the percentage cost of rent.
In the sale of foods it is estimated that successful service
stores have expenses of 16 to 20 per cent, cash-carry
stores of 12 to 17 per cent, and cash-carry self-service
stores of 8 to 14 per cent. The expenses of chains may
be slightly less in some instances.
Self-service stores have several limitations. In the
first place, they are adapted only to the sale of more or
less staple merchandise, and usually to packaged mer-
chandise. They are not adapted to the sale of fresh
meats or to the sale of wearing apparel where the
customer needs the advice and assistance of the salesman.
Independent Stores 159
The self-service method involves no saving to the
small store. It usually requires two people to operate
a self-service store. The small neighborhood store oper-
ating with one or two people would not reduce it labor
expenses by changing to the self-service method, unless
such a change increased its sales. Some self-service
stores have relatively large losses from theft, and some
employ watchers to guard against thievery.
Chapter 9
Review Questions
1. What is meant by an independent store?
2. What are the more important problems of the small
store?
3. Is the trade of rural stores increasing or decreasing?
Why?
4. What are the competive advantages of the rural store?
5. What are the competitive disadvantages of the rural
store?
6. What can you say of the opportunities of the rural
merchant?
7. What is meant by a trading center?
8. What attracts customers to a trading center?
9. What are the advantages of trading center stores con-
trasted with rural stores?
10. What are the advantages of trading center stores as
contrasted with stores in large cities?
11. What are the disadvantages of trading center stores
contrasted with rural stores? With stores in large cities?
12. What types of goods are handled by down-town inde-
pendent stores?
13. Who are the chief competitors of the small down-town
stores?
160 Independent Stores
14. What are the advantages of the small down-town stores
as contrasted with the neighborhood stores? With the large
down-town stores?
15. What are the disadvantages of the small down-town
stores as contrasted with the neighborhood stores? With the
small town stores? With the large down-town stores?
16. What are the advantages of neighborhood stores?
17. What are the disadvantages of neighborhood stores?
18. What effect is the automobile having on neighborhood
and suburban stores?
19. What can you say of roadside and streetside selling?
20. What are self-service stores? Do consumers like them?
21. What are the advantages and limitations of self-service
stores?
Thought Problems
1. What do you think of the future of retailing in the
small villages of the country?
2. Some individual stores handle only one kind of goods,
for example, one brand of candy. Other so-called "specialty"
stores, like the drug store and the hardware store, handle a
great variety of goods. The present tendency is said to be
toward handling more and more different articles. The argu-
ments are that a greater variety of goods helps to serve the
consumers and that additional lines can be handled without
proportionately increasing expenses for rent, wages, and light.
On the other hand, it is argued that carrying a wide variety
of goods means that stocks are limited and incomplete; that
many colors, sizes, or styles are not stocked; that many goods
become soiled and obsolete before they are sold; and that
the store tends to become a "junk shop."
Evaluate these arguments. How can a merchant determine
whether he should add additional lines to his stock or cut
out some of his present lines and specialize on a smaller
number of lines?
Independent Stores 161
3. It has been said that the volume of retail hardware
business has been declining. One explanation is that the
hardware merchants have interpreted the term "hardware"
too narrowly — that they have not added new lines to take the
places of goods (harness, buggies, and other horse goods, for
example) that have gone out of use or have declined in im-
portance. Comment. What lines can the hardware dealers
add to their stocks to increase their volume of sales?
4. How do the small stores hold so much of the trade
as they do when many of them are inefficiently managed?
5. Zoning ordinances limit the areas in which stores can
be located. How will zoning affect the number of retail stores?
Will zoning help or harm the small individual stores?
6. From the consumers' standpoint, should the small
neighborhood stores be prohibited?
7. What do you think of mechanical selling by vending
machines?
8. It is said that stores in many trading centers have
broadened their lines to such an extent that few of them carry
fully assorted stocks. There is considerable overlapping of
stocks between stores. For example, several stores in a town
may carry shoes of the same sizes and at the same prices,
whereas no store has complete stocks of wide and narrow
sizes nor of high and low priced shoes. Sporting goods may
be carried by the hardware stores, department stores, drug
stores, and book stores, but no store in town may have a
complete line. Such a condition does not properly serve the
consumers and is said to drive trade to other towns.
To remedy such a situation it is suggested that the, mer-
chants in the town get together and agree on the lines which
each will carry. For example, one shoe store will carry nar-
row lasts in both popular and high prices, and the other stores
will agree not to handle the very narrow lasts. Another store
may agree to handle the very wide lasts, another arch sup-
port shoes, and so on. All would handle the popular sizes
and styles in the popular price lines. This can be done for
all lines of goods, so that buyers will find that they can get
practically anything they want in the town. The merchants
162 Independent Stores
will secure a reputation of having complete stocks and the
town will draw more trade from surrounding territories and
will hold more of its own trade at home.
Criticize this suggestion. Suggest ways of getting the mer-
chants to agree to such a proposal.
CHAPTER 10
Department Stores and Mail-Order Houses
Department Stores
Definition. — A department store is a retail store which
has a departmental organization and which handles a
variety of goods including women's wearing apparel or
dry goods. A departmental organization means that
the different kinds of goods are separated in location
and management and that records are kept showing the
sales, purchases, expenses, and profits of each class of
goods (or department). Most department stores are
located in the shopping sections of cities and are patron-
ized largely by women.
The department store is usually integrated and per-
forms the retail and many of the wholesale functions.
Buying is particularly important among the wholesale
functions, and the stores send their buyers to the large
markets regularly. The larger stores maintain perma-
nent buying offices in New York and in other important
markets such as Paris. Their buyers visit Europe, the
Near East, and the Orient. The department stores are
constantly on the lookout for new goods and bargains,
and often buy job and odd lots at reduced prices. The
larger stores have stylists who study fashion trends;
and some of them originate their own designs and ar-
range with manufacturers to produce the goods.
The importance of the buying function increases with
the size of the store. A recent study showed that de-
163
B HIII
I III!!
(II
Courtesy Mandel Bros.
Fig. 15. — A large department store. Such buildings contain sales
rooms, offices, and usually storage space for small goods. Bulky goods,
like furniture, are often stored outside the shopping districts, and goods
for delivery may be taken outside for sorting. See Fig. 17 on page 168.
164
Department Stores and Mail-Order Houses 165
partment stores with sales of $1,000,000 to $2,000,000
had buying expenses of 3 per cent, while those with
sales of over $10,000,000 had buying expenses of 4.5
per cent. The larger department store largely eliminates
the wholesale selling expense, buying only fill-in orders
from the wholesalers. Smaller department stores buy
a larger part of their goods from the wholesalers. De-
partment stores usually have stock rooms in their build-
ings and often have separate warehouses located outside
the retail districts. Many goods are delivered by the
manufacturers as they are needed, so that large stocks
do not have to be carried.
Many large down-town specialty stores selling cloth-
ing, furniture, and household furnishings have a depart-
mental organization. Such stores will be included in
the following discussion.
Importance. — The Distribution Census of 1933 reports
4,221 department stores with sales of over $100,000, in
1929, and 3,544 such stores in 1933. These stores had
sales of $4,350,098,000 in 1929 and $2,544,960,000 in
1933. They did 8.9 per cent of the business done by all
retail stores in 1929 and 10.2 per cent of the total in
1933. Department stores make up less than one-third
of one per cent of all retail stores in the country, yet
they do approximately 10 per cent of the total business
done by retail stores. The department stores sell princi-
pally shopping goods. They are particularly important
in the sale of women's clothing, household furnishings,
and furniture. The Sample Census showed that they
sold more than one-half of all the household furnishings,
and between one-third and one-half of all the toilet
articles and women's clothing (excluding shoes) sold in
the cities studied. They are also relatively important
in the sale of children's clothing, men's furnishings, au-
166 Department Stores and Mail-Order Houses
tomobile tires and accessories, and household, hardware,
and garden supplies. They are relatively unimportant
in the sale of groceries, meats, drugs, tobacco, and ice
cream. In many of such convenience lines they do less
than five per cent of the total business.
Organization. — A department store usually has four
major divisions — merchandise; finance or control; sales
promotion or publicity; and store management.
The merchandise division buys and sells the goods.
It is divided into departments handling different kinds
of goods. A large store will have from 50 to 200 mer-
chandise departments in the charge of buyers, working
under the supervision of merchandise managers. A
smaller store will have fewer departments. In some
stores the buying and selling functions are separated, so
that the buyers buy the goods and sales managers are
responsible for their sale. Up to the present, however,
the buyers in most stores are responsible for both the
purchase and the sale of the goods in their departments.
The finance, or control, division is usually under a
controller who has charge of the accounting, credit, sta-
tistical, and finance departments.
The sales promotion, or publicity, manager has charge
of the store's advertising and window displays and is
responsible for planning special sales or "promotions."
The store manager, or superintendent, is in charge of
the store building and the delivery of goods. He must
heat, clean, guard, light, and care for the building. He
is responsible for the personnel department, which hires
and trains most of the employees.
The department store has central departments which
handle the advertising, credit, collections, delivery, and
accounting, and which hire and train employees. These
functions are in the hands of specialists who may become
Department Stores and Mail-Order Houses 167
expert in the management of their departments. This
expert supervision may enable the department store to
perform these operations better than the small store
which cannot employ experts.
A woman's store. — The department store is patronized
largely by women. Women are said to spend more time
Courtesy Abbott, Merkt <& Co.
Fig. 16. — Sorting of packages for delivery by a city depart-
ment store.
in shopping than men. They look at more goods and
compare quality, styles, and prices more carefully. It
has been said that the typical woman visits three stores
before buying shopping merchandise. Women trust
their judgment much more than men, which means
that brands are of less importance in selling to women
than to men.
Men as a rule dislike shopping in department stores
168 Department Stores and Mail-Order Houses
unless they have separate men's departments that can
be easily reached from the street. Men usually prefer
specialty stores which are conveniently located and in
which they can make their purchases quickly. Depart-
ment stores often have large sales in men's furnishings,
Courtesy Abbott, Merkt <6 Co,
Fig. 17. — Warehouse and remote delivery depot of a city de-
partment store. Goods arc stored here until they are needed on the
sales floors. Packages are brought here from the store and are sorted
for delivery to the customers.
but the sales are usually made to women. The depart-
ment stores that have made large sales to men usually
entirely separate the men's departments from their other
departments.
Service. — Most department stores emphasize their
services. They extend credit liberally, give free and
frequent deliveries of goods, send out goods on approval,
fill telephone orders, and allow the customers to return
Department Stores and Mail-Order Houses 169
goods on almost any excuse. Many department stores
have free rest and writing rooms, children's play rooms
or nurseries, and auditoriums or lecture rooms. Many
of them operate service departments, such as restaurants,
beauty parlors, and barber shops, at a loss to attract
customers to their stores.
Most department stores have adopted the motto "The
customer is always right." This means that customers
are allowed to return or exchange goods whenever they
feel justified in doing so. Margins, expenses, and profits
of department stores are shown in Tables 18, 19, and 20.
TABLE 18.— MARGINS, EXPENSES, AND PROFITS OF
DEPARTMENT STORES ACCORDING TO SIZE, 1934f
Size of Stores
Margin
Expense
PROFIT OR GAIN
Number oj
(Annual Sales
%of
%of
%of
% of In-
Stores
Volume)
Sales*
Sales
Sales
vestment
Reporting
Under $150,000.
. 33.5
31.2
2.3
4.5
75
$150,000- 300,000 .
34.5
32.2
2.3
4.5
74
300,000- 500,000
36.3
33.9
2.4
5.5
47
500,000- 750,000
37.2
34.0
3.2
6.6
40
750,000- 1,000,000
37.0
35.0
2.0
3.0**
26
1,000,000- 2,000,000
37.8
35.2
2.6
4.0
66
2,000,000- 4,000,000 .
38.6
36.2
2.4
4.6
55
4,000,000-10,000,000
39.2
37.1
2.1
4.8
51
10,000,000-20,000,000
40.1
37.2
2.9
5.2
17
20,000,000 and over..
40.2
37.2
3.0
7
t Figures from Harvard Bureau of Business Research Bulletin No. 96.
*Including other income.
""•"Incomplete.
Competitive advantages of the department store:
Buying power. — The department store is usually a large
store which buys in large quantities. This frequently
enables it to secure lower prices than the small specialty
stores. There is an advertising value in having goods
sold in the large department stores, for which reason
manufacturers are often willing to give price concessions
to induce the larger stores to handle their goods.
170 Department Stores and Mail-Order Houses
Convenience of a single store. — The ability to make all
purchases in one store and on one line of credit is an
advantage to the customers.
Advertising. — The department store can advertise ad-
vantageously. It usually draws trade from the entire
TABLE 19.— OPERATING STATEMENT FOR 66 DEPARTMENT
STORES WITH SALES OF $1,000,000-$2,000,000 IN 1934
Per Cent of Sales
Net sales 100.0
Cost of merchandise 65.6
Gross margin (including "other income") 37.8*
Expenses:
Pay roll 17.5
Real estate (rent, taxes, interest,
insurance, etc., on buildings) 4.5
Advertising 3.6
Taxes (other than real estate) 0.4
Interest " " " " 2.3
Insurance " " " " 0.4
Depreciation " " " 0.9
Supplies 1.6
Bad debts 0.4
Travel and communication 1.0
Repairs 0.4
Other 2.2
Total 35.2
Net gain (profit) 2.6
Net gain on investment 4.0
*Includes "other income."
TABLE 20.— MARGINS, EXPENSES, AND PROFITS OF
DEPARTMENT STORES, 1930-34
(74 Stores with Sales over $2,000,000 in 1930) f
PERCENTAGES OF SALES
Year Margin* Expense Profit
or Gain
1930 37.2 34.2 3.0
1931 37.4 36.2 1.2
1932 37.6 39.8 -2.2 (loss)
1933 . . 40.1 38.2 1.9
1934 .... 39.7 36.5 3.2
tFigures from Harvard Bureau of Business Research Bulletin No. 96.
"Includes "other income."
Department Stores and Mail-Order Houses 171
circulation area of the city papers and hence pays for
very little waste circulation. When a customer is drawn
to a department store by the advertisement of one ar-
ticle, she is very apt to purchase other articles. The
department store is large enough to employ specialists
to plan and write its advertisements.
Location. — The department store is located in the
shopping section. This means that it is well located to
secure the shopping trade, but also that it is in the
high-rent district. It can partly offset the higher
cost of this location by using several floors for sales
purposes.
Cut-price leaders. — It is doubtful if the average prices
of the department stores are below those of many com-
peting stores. Department stores, however, make very
effective use of cut-price leaders. These leaders cause
many people to feel that they can purchase goods more
cheaply at department stores than at the small specialty
stores.
Competitive disadvantages of the department store. —
The department store has certain serious disadvantages
or limitations. It usually has high operating expenses
owing to the cost of management, the cost of rendering
liberal service, its location in the shopping district, and
the fact that it performs many of the wholesale func-
tions. Expenses are usually above 30 per cent and in
the larger stores often above 35 per cent. The high
expenses, however, may be partly offset by the saving of
a part of the wholesaler's margin. Figures given in
Chapter 21 show that the average sales for employees
in department stores are relatively low — $8,406 per full-
time employee in 1929. This poor showing appears to
be due to the large number of people in supervisory
positions, to the concentration of sales during a short
172 Department Stores and Mail-Order Houses
daily period, and to the many services performed for
their customers.
The department store usually has an excellent location
for the shopping trade, but this very fact means that
its location is poor for the sale of convenience goods.
Another disadvantage is that the large store lacks per-
sonal touch and acquaintanceship with its customers.
Problems of the department store: Management. —
The large department store has many employees, and
their rate of turnover is often high. This gives them a
serious problem in hiring and training employees. It
is the author's observation that department stores often
have poorer salesmanship than many of the smaller
stores. They have difficulty in securing a high grade of
workers. The employees must be trained by other em-
ployees, and there are so many to train that they are
often placed on the sales floors with very brief instruc-
tions. Sometimes they are taught only how to make out
the necessary records for cash and credit sales before
being allowed to sell. In such cases poor salesmanship
is almost sure to result.
A good deal has been heard in recent years about the
difficulty of securing efficient managers. As a rule, the
managers of the major departments receive very nice
incomes; in the larger stores figures of from $5,000 to
$25,000 are frequently mentioned, and stories are heard
of a few much higher incomes. Many of the stores are
devoting much more attention than formerly to securing
and training men and women for managerial positions.
Many stores definitely try to obtain university graduates,
who are then given special training with the expectation
that some will develop into efficient managers.
Success of department stores in the past has depended
upon the skill of their buyers in buying and selling goods
Department Stores and Mail-Order Houses 173
at a profit. Fashion has become so important that many
argue that the buying and selling functions should be
separated so that the buyers could devote all of their
time to the purchase of merchandise. It is argued that
better results would be obtained on the sales floors if
they were in the charge of sales managers instead of the
buyers, who are away much of the time. The buyers,
however, usually oppose this change, for they do not
like to give up their authority, and in most stores they
are still responsible for the sale of their goods.
Abuse of service. — Many customers abuse the services
offered by department stores, particularly in the return
of goods. The stores are glad to accept returned goods
when they have made mistakes and when the goods are
defective, but many buyers abuse this privilege. Some
return goods for no reason except that they have changed
their minds. Some goods are returned after they
have been out of the store for considerable periods, or
even after they have been used. In many stores from
8 to 10 per cent of all goods are returned, and in the
larger stores returns of over 10 per cent are not unusual.
Many stores have felt it necessary to conduct special
campaigns to induce their customers to return fewer
goods.
Expense. — The expenses of many department stores
have mounted so high that it has been difficult for them
to make profits. Executives have tried hard to reduce
expenses but often with little success. In the larger
cities, the stores do the bulk of their business in 4 to 5
hours daily; and on days when the weather is bad few
shoppers come down town, but the store's expenses go
on just the same. Certain days of the week and certain
periods of the year are also dull. The costs of super-
vision and of rendering services are high. Many stores
174 Department Stores and Mail-Order Houses
have been unable to reduce expenses and have succeeded
in maintaining profits only by increasing their gross
margins, which means that they either buy their goods
more cheaply or sell them at higher prices.
Mail-Order Houses
Types of mail-order sellers. — There are several types
of mail-order sellers — the manufacturer selling to the
dealer or the industrial consumer, the manufacturer
selling to the ultimate consumer, the wholesaler selling
to the retailer, and the retailer selling to the consumer.
We have in mind in this chapter the manufacturer or
middleman selling to the ultimate consumer. There are
both specialty and general mail-order sellers. The spe-
cialty house sells only one product or a few allied pro-
ducts, whereas the general line house offers a wide variety
of merchandise. Sears, Roebuck & Co. and Montgomery
Ward & Co. have been among the more widely known
houses of the latter type. They now operate both over-
the-counter and mail-order stores.
Some concerns sell exclusively by mail, while others
sell both by personal salesmen and by mail. Some retail
stores have mail-order departments. Most sellers re-
ceive some business by mail, but, to be considered as
doing a mail-order business, a seller should actively so-
licit mail orders and should make a large part of his
sales by mail.
There are two methods of selling by mail : first, direct-
mail advertising, by which letters, circulars, catalogues,
or other printed material is sent to prospective buyers
by mail; second, by means of advertisements in periodi-
cals. The mail-order seller may use either or both of
these methods.
Department Stores and Mail-Order Houses 175
Growth of selling by mail. — The origin of mail-order
houses dates back to the 1870's, but their largest growth
came after 1890. Mail-order selling grew with the de-
velopment of the railways and the mail service.
In order to build a permanent business, confidence
based on honest dealings and satisfaction must be se-
cured. Some mail-order sellers advertise: "Send no
money/' "Goods sent on ten days' free trial/7 or "Ex-
amine the goods before you pay." Many give a very
strong guarantee and allow the customers to return
goods for any reason and to receive a refund of their
money plus transportation costs.
Goods sold. — The consumer who wants some article
that is not in common use in his community may find
it easier to order from the catalog than to hunt for the
article locally. Mail-order sellers have often handled
goods which the rural and small-town stores did not
carry, such as new goods, late styles, novelties, special-
ties, fruit trees, shrubbery, pure-bred livestock, and new
mechanical devices. The fact that mail-order houses
found their largest market in the rural districts would
indicate that the variety and type of goods offered was
one of the main reasons for their growth.
Low prices. — Many mail-order sellers emphasize low
prices. In many cases the mail-order houses have under-
sold the local stores, even when transportation charges
were included. This they were able to do because they
bought their goods in large quantities on a wholesale
basis or manufactured them themselves.
The anger of the rural dealers was aroused by the
fact that their customers were constantly telling them
that their prices were higher than those of the mail-
order houses. The local dealers were forced to reduce
their prices. In some rural communities the mail-order
176 Department Stores and Mail-Order Houses
sellers were said to have obtained as much as 20 and
even 40 per cent of the retail business. But, taking the
country as a whole, we find that the local dealers suc-
ceeded in holding most of the trade. The largest effect
of the mail-order catalogs was that they forced the
local dealers to reduce their prices and to handle a
greater variety of goods.
Volume of mail-order business. — The Census reported
311 retailers selling largely by mail in 1933, with sales
of 244 millions of dollars; in 1929 there were 271 mail-
order houses with sales of 515 million dollars. This
was 1 per cent of the total retail sales in each year. The
total volume of mail-order business, however, is larger
than is indicated by these figures. A very large number
of manufacturers, other producers, and retailers sell
large quantities of goods by mail, but unless more than
one-half of their sales are made by mail, they are not
classed as mail-order houses by the Census. Ninety per
cent of the business reported by the Census was done
by stores handling a variety of merchandise — that is,
by mail-order department stores.
Average operating expenses of these mail-order re-
tailers were 23 per cent in 1929 and 28 per cent in 1933.
Advantages of selling by mail. — The principal advan-
tages of buying by mail are the ability to secure goods
unobtainable at many local stores; low prices; and the
ease of ordering by mail. The principal advantages of
selling by mail are the low cost of goods because of
large-scale buying or manufacture; low operating ex-
penses; and freedom from local depressions.
The large mail-order houses commonly buy direct from
the manufacturers, thus securing low prices. They often
take the entire output of factories or a very considerable
portion of their outputs, and sometimes they secure fac-
Department Stores and Mail-Order Houses 177
tories and manufacture their own goods. The small
specialty mail-order seller may have a relatively small
volume of sales and yet secure quantity prices, for
he sells only a few lines. On bulky products the storage
function may be largely shifted to the manufacturers,
orders being forwarded to the factories for shipment.
The mail-order house has heavy advertising expenses,
but its other expenses may be low. It has no personal
salesmen, can locate its plant outside the high-rent retail
sections or on upper floors, can often turn its stock rap-
idly, frequently extends little credit, and does not have
to provide expensive fixtures, since the customers do
not come to its store. The mail-order house often sells
nationally. It is thus free from local depression that
may be very serious to local retailers.
Success or failure in selling by mail depends largely
upon the response of the consumers to the advertising.
The mail-order seller spends money for advertising. If
it draws well, his percentage of expense will be low.
Successful sellers by mail are reported to have advertising
expenses of from 5 to 10 per cent. Specialty sellers
by mail with products carrying large margins may spend
much more on advertising and still make a profit.
Suppose a concern sells an article for $10 that carries
a gross margin of 50%, or $5. Suppose it costs 8^ to
prepare and mail a piece of advertising matter. The
concern mails out 10,000 pieces at a cost of $800. A
1-Va Per cen^ return (sales) will give 150 sales and a
total gross margin of $750; this margin is less than the
advertising cost. Suppose that new advertising copy
is prepared, or that a different mailing list is secured,
and 10,000 more pieces are mailed. If this mailing se-
cures a 21/!) per cent return, 250 sales will be made on
which the gross margin will be $1,250. After paying the
178 Department Stores and Mail-Order Houses
advertising cost, $450 remains to pay other expenses
and for profit. Thus a 2% per cent return may be
profitable, while a 1% per cent return is unprofitable.
On such narrow differences does success or failure de-
pend. If an exceptionally attractive article is offered, or
if the advertising is exceptionally good, the returns may
be so large that the business is highly profitable. On the
other hand, a very large percentage of the attempts
to sell by mail prove unprofitable.
Very commonly the first sale made by mail is made
at a loss. Profits are made on repeat orders. Some
people will order by mail and some will not. The mail-
order seller's job is to find those who will buy by mail.
When they are found and a mailing list is made up of
satisfied customers, the percentages of return will be
much higher than those obtained by sending advertise-
ments to new prospects. Thus success in selling by
mail may depend upon having many articles to sell or
upon selling "repeat" articles which customers buy fre-
quently. The furniture and farm supply houses have a
variety of goods to offer their customers, while those
selling wearing apparel have repeat goods.
Disadvantages of selling by mail. — The lack of per-
sonal salesmanship and personal contact with the cus-
tomers is probably the greatest handicap in selling by
mail. Ordering by mail is impersonal. The consumer
often wants personal advice or assurance from the sales-
man. When the mail-order house has told its story in
its advertising, it is through. It cannot answer questions,
meet objections, or make an appeal for business on the
basis of friendship. At times the mail-order house has
had very excellent advertising, whereas many of the
local stores have had very poor personal salesmanship.
This gave the mail-order house some advantage, but
Department Stores and Mail-Order Houses 179
personal salesmanship is inherently stronger than ad-
vertising.
The buyer cannot examine the goods when ordering
by mail, and the best that advertising can do is partially
to overcome this handicap. In standard merchandise
that is familiar to the buyer, this may make little differ-
ence. With shopping goods, however, the customer likes
to see the goods before she buys because color, design,
fit, and quality of material are important. Even the
best of colored pictures is a poor substitute for actual
examination of the goods.
Since there is a delay in the delivery of goods bought
by mail, the buyer must anticipate her wants. This can
often be done, and the regular mail-order buyer gets in
the habit of doing it. Wants, however, cannot always
be anticipated. The mail-order house cannot be used
for fill-in goods or for emergency purchases. If ex-
changes are necessary, additional delay is involved and
this takes time not allowed for when the goods were
ordered. Adjustments likewise cause delay and often
annoyance.
The mail-order seller is handicapped in rendering cer-
tain types of service. He cannot demonstrate his goods
or tell the buyers how to use them except by printed in-
structions. He cannot make repairs unless the goods
are returned or unless he sends a man to the customer,
which is expensive. He can carry repair parts, but it
may take the customer longer to order a part by mail
than to secure it from the local store.
The mail-order seller does not ordinarily sell highly
perishable goods, such as fresh meats. He is handi-
capped to some extent in selling very bulky goods upon
which the transportation costs are high. Some mail-
order houses have largely overcome this handicap by
180 Department Stores and Mail-Order Houses
establishing a number of regional warehouses to which
bulky goods are shipped in carlots.
Decline in mail-order business. — According to com-
mon opinion, the mail-order business has declined rela-
tively, if not absolutely, during the past few years. In
many communities, the farmers report that they buy
less by mail than they did before the automobile came
into general use. Many rural dealers report that they
feel mail-order competition less than formerly. Several
of the larger and better known mail-order houses have
entered the chain-store business, indicating that they
see little room for growth in the mail-order field.
Three reasons are advanced to explain this decline:
first, the automobile, which permits the rural population
more easily and more frequently to visit the larger towns
where the stores carry larger assortments of goods; sec-
ond, the increase in the amount of direct-mail adver-
tising matter received by most buyers, which may cause
each piece to receive less attention ; and third, the fact
that the local merchants and chain stores have been
able to meet, or. more nearly to meet, the prices of the
mail-order houses.
Chapter 10
Review Questions
1. What is a department store?
2. How do department stores perform the wholesale func-
tions?
3. What can you say of the importance of the department
stores?
4. Where are most department stores located?
5. In the sale of what lines of goods are the department
stores especially important?
Department Stores and Mail-Order Houses 181
6. How do you explain the fact that less than one-third
of one per cent of the country's stores do 10 per cent of the
total business?
7. How are department stores organized? What are the
main divisions? What are the duties of each division?
8. What advantage does the department store secure from
its centralized departments operated to serve the entire store?
9. Contrast the ways in which men and women shop.
10. Why do the department stores give such liberal serv-
ice?
11. What are the main competitive advantages of the de-
partment store? Which of these apply in competition with
the chain store?
12. How does the department store secure an advantage in
advertising?
13. How do department stores use cut-price leaders?
14. What are the competitive disadvantages of the depart-
ment store?
15. What are some of the difficult problems facing the de-
partment stores?
16. What classes of concerns sell by mail?
17. In what two ways do mail-order sellers advertise for
business?
18. What advantages enabled mail-order sellers to take
business away from the local stores?
19. How do mail-order sellers secure the confidence of the
consumers?
20. What are the principal advantages in selling by mail?
21. What determines the success of a mail-order seller?
22. What are the principal disadvantages of selling by
mail?
23. Why has mail-order selling declined?
182 Department Stores and Mail-Order Houses
Thought Problems
1. Does the fact that the department store performs the
wholesale functions reduce the total marketing cost?
2. How can a store secure a "feminine atmosphere"? A
"masculine atmosphere"? How should a store be arranged
to appeal to women?
3. Why do department stores have such a low quality of
salesmanship? Do you believe that they could secure better
salesmanship? If so, how? If not, why?
4. The services offered by the department stores are
abused by some of their customers. This is especially true
of the return privilege. How may the stores reduce the per-
centage of goods returned without losing goodwill?
5. Some have said that the department stores have erred
in placing so much emphasis on service. Comment. A few
have been successfully operated on a cash basis. Do you
believe that more department stores should go on a cash
basis? Could a department store operate on a carry basis
and make separate charges for all deliveries? Are the spe-
cial services, such as writing rooms, lectures on household
management, and nurseries, profitable to the stores?
6. It has been said that one trouble with the department
store is that it has not attracted enough of the higher type
of employees. It has been said that many ambitious young
people have thought of work in department stores as "counter
jumping" with no opportunities for really worth-while posi-
tions. Department stores have many low-paid employees,
but, on the other hand, they have many highly paid em-
ployees. One department store with 5,000 employees had,
in 1930, 600 people receiving from $3,000 to $50,000 a year;
300 receiving from $1,500 to $3,000; and 4,100 receiving un-
der $1,500 (very few under $1,000).
Many department stores are said to be definitely trying
to secure more high school and university graduates. Do you
believe that the securing of more educated people will improve
the quality of salesmanship and management and lead to more
efficient operation of stores?
7. How may a mail-order house secure mailing lists?
CHAPTER 11
Chain Stores
Definition. — A chain-store system consists of a group
of retail stores under one ownership and management,
with some uniformity in the methods of operating the
various stores. The Census considers four stores as the
minimum number which constitutes a chain. Two and
three stores under a common ownership are referred to
as two-store and three-store multiples, or two-store and
three-store independents.1
We ordinarily think of the chain store as being an
integrated concern performing both the wholesale and
the retail functions, although some of the smaller chains
are not large enough to do this.2 The chain has a central
buying office which purchases goods for its various stores.
The larger chains operate one or more warehouses from
which goods are supplied to the stores in the system.
We also speak of chains of wholesalers, warehouses,
banks, and theaters, although these are not usually called
"chain stores."
Types. — Chain stores may be classified as to owner-
ship, kind of goods handled, location, and method of
operation. As for ownership, there are retail, wholesale,
manufacturer's, and public utility chains. The retail
chain is owned by an organization primarily interested
1 A distinction is made between a chain-store system and a branch-
store system. A branch system consists of one large or dominant
store and one or more small or subsidiary stores which get much of
their merchandise from the parent store.
2 It is argued by some that these small chains are not real chains.
183
184
Chain Stores
in retailing. A wholesale chain is owned by a wholesaler.
Many wholesalers have entered the chain-store business
because the number of the independent stores from
which they drew their customers was reduced by the
growth of chain stores. If the wholesaler ceases selling
Trade Channel Trade Channel
Manufacturer — Wholesaler— Retailer Through Chain Store
KEY: M— - Manufacturer; W— Wholesaler; Rr— Retailer ; V— Consumer;
C.W.— C/iatn Store Warehouse
Fig. 18. — Chart showing trade channels through manufacturer-
wholesaler-retailer and through chain store. Note the reduction
in sales effort and expense in the chain store.
to independents and operates his wholesale house merely
as a supply department for the retail stores, he would
be considered as the operator of a retail chain. A manu-
facturer's chain is owned and operated by a manufacturer
for the selling of a part of the goods produced. A public
utility chain is operated by an electric or gas company,
usually to sell merchandise which will increase the sale
of its electricity or gas.
Chain stores are often classified according to the .type
Chain Stores
of goods handled, as groceries, drugs, furniture, radios,
and so forth.
With respect to location, chains are classified as local,
sectional, and national. A local chain is one operating
in one city and its neighborhood. A sectional chain is
one operating in one section of the country, as in the
New England states or on the Pacific Coast. A national
chain is one operating in several sections of the country.
The local chains do about one-third and the sectional
and national chains about two-thirds of the chain-store
business.
Chain-store systems operate in different ways. Some
operate on the cash-carry basis; some give credit and
delivery service; some use personal salesmen, while some
operate on the self-service basis; and some operate leased
departments in other stores.
Importance. — In the United States the chains have
had most of their growth since 1900, and particularly
since 1920. They did 21.5 per cent of the total business
done by all retail stores in 1929 and 25.2 per cent of the
total in 1933. (See Table 21 on page 187.) This was
a rapid gain for a four-year period and may have been
due in part to the depression which caused people to
economize. The chains operate less than 10 per cent
of the total number of stores and yet do one-fourth of
the business. This is explained by the fact that most
of the very small stores are operated by independents.
A chain cannot afford to operate a very small store
because it must pay regular wages to the employees and
because it also has the expense of supervision. In 1933,
the average sales of all independent stores was $13,200
compared with an average of $44,600 for all chain stores.
There were 5,546 chains operating 141,603 stores in
the United States in 1933. Chains operating grocery
186 Chain Stores
and meat, grocery, variety, department stores, and filling
stations did the largest volume of business. Variety
chains (5^f to $1 stores) did 91 per cent of the business
of all variety stores. It appears that the buying ad-
vantages of the chains make it difficult for independent
variety stores to compete with them. Many department,
hardware, stationery, confectionery, and other types of
stores, however, sell the same type of goods as those
sold by the variety chains. Chains selling shoes, gro-
ceries, and groceries and* meats do more than 40 per cent
of the total business done by all such retail stores. We
must not assume, however, that the chains sell over 40
per cent of all the shoes, for many shoes are sold by in-
dependent clothing and department stores. The chains
do more than one-third of the business done by filling
stations and tobacco stores. These figures are given in
Table 21.
The chains have had their largest growth in staple
merchandise that is adapted to large-scale buying and
routine selling, such as groceries, gasoline, and variety
goods. There has also been a considerable growth in the
sale of wearing apparel sold by department, clothing,
and shoe chains. These chains have the advantage of
being able to keep stylists in the central markets at all
times to watch fashion trends. Their stockkeeping
methods enable them to limit losses on garments because
of fashion changes — a risk which is often serious with
independent stores. The chains have had relatively
little growth in the sale of hardware, farm equipment,
jewelry, automobiles, and furniture.
Organization. — The chain is usually organized with a
central office from which goods are purchased and the
various stores supervised. This central office has buyers
for the various lines of goods handled; a superintendent
Chain Stores
187
188 Chain Stores
to operate its stores; and managers in charge of adver-
tising, real estate, accounting, warehouses, and any
factories operated. Large chains have supervisors work-
ing under the superintendent to oversee the store man-
agers.
Expenses. — The chains buy many of their goods direct
from manufacturers. Some have factories and manu-
facture a part of their goods.3 The expenses of the chains
cover both retail and wholesale expenses and should
be compared with the combined expenses of independent
wholesalers and retailers.4 The 1933 Census reported
average expenses of 27.1 for the retail stores of chains,
and 4.3 per cent for their central offices, or combined
expenses of 31.4 per cent. This is an average for all
types of chain stores. A comparison of the expenses of
wholesalers and retailers with those of chains for eight
trades is shown in Table 22. We must remember that
many of the chains operate on a cash-carry basis while
most of the independents operate on a service basis. A
Census survey showed that the independents made 38
per cent of their total sales on credit, while the chains
made only 19 per cent of their total sales on credit.
It will be seen from the figures in Table 22 that the
8 A study made by the Federal Trade Commission shows that the
chains buy 70 per cent of their goods direct from manufacturers, 7
per cent from growers and growers' organizations, 7 per cent from
brokers and commission merchants, and 8 per cent from wholesalers.
They manufacture 7 per cent of their goods and obtain the other 1
per cent from various sources.
4 This is not a perfect comparison since the independent retailers
buy large quantities of goods direct from manufacturers and since the
chains buy some goods from wholesalers. The smaller chains buy
many goods from the wholesalers, and the larger chains patronize
wholesalers for perishable products and "fill-in" orders. However, as
the small independents buy a very large proportion of their goods from
the wholesalers while the chains buy relatively small quantities from
the wholesalers, this is the best way of making a comparison of ex-
penses.
Chain Stores 189
TABLE 22.— EXPENSES OF INDEPENDENT WHOLESALERS
AND RETAILERS AND OF CHAIN STORES
(Per Cent of Sales)
Type of Store Combined Expenses of Expenses of Chain Stores
Wholesalers and Retailers (Federal Trade Commis-
(Census Figures for 1929) sion Figures for 8 Years
between 1913 and 1930)
Drug 43.4% 32.4%
Grocery 25.3 18.5
Meat 26.6 20.0
Furniture 46.6 37.2
Men's clothing 39.9 30.4
Men's furnishings .... 40.9 36.8
Shoe 38.0 29.7
Women's apparel 38.7 29.5
expenses of chains selling men's furnishings were 4.1
per cent lower than the expenses of the independents.
The expenses of chains handling other types of apparel
had expenses from 8 to 10 per cent below the inde-
pendents. The food chains had an advantage in expenses
of between 6 and 7 per cent.5
Differences in the operating expenses of chains and
independents do not necessarily indicate the difference
in their selling prices. The two profits of the whole-
saler and retailer may be higher than the single profit
of the chain. If so there will be a larger difference in
their selling prices than is indicated by the expense
figures.6
Advantages of chain stores. — The chains have the fol-
lowing advantages: lower cost of goods; lower prices;
lower expenses because of integration, limited service,
and efficiency; fresher goods; and relatively cheap and
attractive advertising.
6 Studies of the expenses of chains of various sizes show no particu-
lar advantage for either large or small chains.
6 A study by the Harvard Bureau of Business Research covering
grocery stores shows a difference in expense of 6.8 per cent in favor of
the chain, but a difference in margin of 82 per cent in favor of the
chain. Bulletin No. 84.
190 Chain Stores
Cost of goods. — Much has been said about the ability
of the chains to obtain their goods cheaper than their
competitors. Lower buying prices may be secured as
a result of quantity purchases, cash payments, adver-
tising allowances, brokerage fees, and shrewd buying.
The chains often buy in large quantities, and quantity
prices and discounts often enable them to secure some-
what lower prices than their smaller competitors. Many
chains are able to take all cash discounts offered on their
purchases because they sell for cash or have ample
capital or bank credit.
Chains very commonly obtain advertising allowances
from the manufacturers. Such allowances are presum-
ably given to cover the featuring of the goods in the
chains' own advertisements, in window and store dis-
plays, and by their salespeople. In many instances,
however, these advertising allowances appear to be
merely price concessions. The chains are often able to
secure such bargains as job lots and distress merchandise.
The chain-store buyers may secure brokerage fees or
commissions by buying direct from the manufacturers.
In some cases brokerage organizations are set up to
perform the broker's functions and secure his commis-
sions. Chain buyers are often very close buyers, in-
sisting on low prices, special allowances, or rebates.
Many stories are heard of inside prices, special allow-
ances, and checks for rebates mailed to the buyers
months after purchases are made.
An investigation made by the Federal Trade Com-
mission found that manufacturers' prices to grocery,
drug, and tobacco chains, after considering all discounts
and allowances, averaged some 2 or 3 per cent lower
than the prices to the wholesalers. As a rule, the chains
seemed to receive somewhat lower prices than the de-
Chain Stores 191
partment stores, and the department stores somewhat
lower prices than the wholesalers. Some of the ad-
vantage of the chains resulted from taking more quantity
and cash discounts than other buyers took. Such dis-
counts are often open to all those who buy in as large
quantities and who pay with equal promptness. A part
of the advantage of the chains, however, apparently
came from special prices and allowances that were not
open to their competitors. It is interesting to note that
the smaller chains sometimes obtained larger conces-
sions than the large chains.
Selling prices. — Chain prices on staple, advertised
grocery products have been found to be from 10 to 14
per cent lower than the prices of independent stores in
cities which the chains have recently entered. In cities
where the independents have been faced with chain
competition for several years, the chains have less ad-
vantage. Studies on staple groceries in such cities have
shown chain prices to be from 2 to 6 per cent below
those of independents, and much of this difference may
be due to the differences in credit and delivery services
furnished by the two types of stores. Under competitive
conditions we expect that the prices of competitors will
eventually be brought fairly close together on goods of
the same quality. Sellers with high prices must increase
their efficiency or drop out of the market.
The chains have less advantage in the sale of perish-
able foods, such as meats, fruits, vegetables, milk, eggs,
and poultry. Such products are often bought locally
and the chains frequently buy from the same sellers
as do the independents. Very often cash-carry inde-
pendents have lower prices on such products than the
chains. When the prices of all foods are averaged to-
gether, the chains have less advantage than when only
192 Chain Stores
staples are considered. In one study in 1931, weighted
average prices of all types of food stuffs, except fresh
meats, showed the chains to be 8.4 per cent under the
independents. However, the cash-carry chains were only
4.2 per cent under the cash-carry independents. In a
later study (1934) the advantage of the chains was
even less — 1 per cent in one city and 4 per cent in
another.
A government survey showed chain drug stores to
undersell the independents by 15 to 18 per cent in
different cities. Most of the chain drug stores were
located in down-town districts where the cut-price policy
could be profitably used in increasing volume, while
many of the independents were in neighborhood loca-
tions which are not adapted to the cut-price plan. An-
other study showed cash chains to be from 6 to 22 per
cent under cash independents in various cities.
Chain and independent filling stations usually have
the same prices on gasoline.
On wearing apparel there are few data on comparative
prices. Comparisons are hard to make, owing to the
difficulty of finding garments known to be of the same
quality.
Expenses. — The chain usually has lower expenses in
operating its wholesale houses than do the independent
service wholesalers. The chain has no salesmen. Sales
force expense is usually the highest single expense of
the service wholesaler, frequently making up a fourth
of the wholesaler's total expense. The chain uses super-
visors to oversee its retail stores, but the expense of
the supervisors is smaller than that of the wholesaler's
salesmen. The managers of the various stores in a chain
requisition the goods either from the chain warehouse
or from the manufacturers with whom the central buying
Chain Stores 193
office has made contracts. This saves the time of the
retail store managers in interviewing salesmen. The
chain-store warehouse has no credit and collection ex-
pense, as it sells only to its own stores. It reduces
delivery expense by operating its trucks on definite
schedules and by sending them away from the warehouse
fully loaded. Each store receives goods only on certain
days. The independent wholesaler must make more
frequent and smaller deliveries to hold his customers.
The chain warehouse handles fewer articles than the
independent wholesaler, for it does not have to cater to
the whims of independent stores. This enables it to
turn its stock faster.
Chain-store warehouses can be located where trans-
portation facilities are good and land is cheap, without
regard to the convenience of its customers. Many chain
warehouses are hew and well designed for economical
operation. Goods may be handled by gravity, by endless
belts, on skids moved on lift trucks, or by endless
cables.
Census data indicate that chain-store warehouses
operate considerably cheaper than service wholesalers
but only slightly cheaper than cash-carry wholesalers.
Some chains operate factories to produce a part of
the goods sold in their stores. Manufacturing is most
common among chains selling hats, shoes, candy, and
clothing. Grocery chains often operate bakeries and
roast coffee, make salad dressings, and pack tea and
butter. The operation of factories involves difficult prob-
lems of management and prevents the chain from buying
distress goods which at times can be bought at less than
the cost of manufacturing them. The operation of fac-
tories, however, eliminates the manufacturer's selling
expenses and often enables the chain to secure goods
194 Chain Stores
cheaper than they can be bought from manufacturers.
Limited service. — Many chains operate on the cash-
carry basis. This policy reduces 'operating expenses and
makes possible lower prices, but it also limits sales, for
some consumers desire credit and delivery services.
Chains often carry limited stocks, which serves to reduce
expenses for rent, stockkeeping, and spoiled goods.
Again, however, this policy keeps some customers away.
Some chains operate on a cash-carry self-service basis.
Efficiency. — The chain stores are usually large enough
to take advantage of division of labor and to employ
specialists to supervise various operations. The chain
system can employ specialists to prepare its advertising,
to plan window displays, to select locations for its stores,
to plan the layout and arrangement of its stores, to
develop accounting systems, to purchase its merchandise,
and to hire and train its employees. If it operates on
a service basis, it has specialists to pass upon credits,
make collections, and supervise deliveries. Specialists
may enable the chain store to perform these various
operations more efficiently than they car be performed
by the independent merchant, who must supervise all
of these operations.
In many instances the chains employ better mer-
chandising than the independents. Their stores are often
better arranged and better lighted, and the merchandise
is displayed more attractively. They often have better
stockkeeping systems, which enables them to turn their
goods faster and to give the public fresher goods.
Stock turnover. — A faster rate of stock turnover is
obtained in two ways: first, by reducing the number
of items carried; and second, by carrying the same
number of items but a smaller quantity of each by
receiving shipments more frequently. In the grocery
Chain Stores 195
field many chain stores carry from 500 to 2000 items in
stock, while the better independents frequently carry
from 1500 to 4000. Chains carrying limited stocks realize
that they lose some sales, but they choose to make their
profits on the faster moving articles and allow the con-
sumers who will not buy these to go elsewhere. In
recent years, however, many chains have increased the
number of articles carried in stock. Some chains have
opened large down-town stores which handle staple and
fancy groceries, meats, fruits, vegetables, and bakery
goods, and operate soda fountains and lunch counters.
Good stockkeeping methods enable the chains to re-
ceive goods in smaller quantities and yet to keep their
stocks fairly complete. Some surveys have shown that
the chains were less frequently out of staple articles
than were the independents. It has been estimated
that the chain-store warehouse and retail store combined
turn their stock on the average in less than one-half
of the time required for a combined turnover by the
wholesaler and independent retailer.
No inherent advantage from efficiency. — Better mer-
chandising is not an inherent advantage of the chains.
Independents can be just as efficient. The relative ad-
vantage of the chain often comes from the inertia of
the independent merchant, who has often been too lazy
or indifferent to study and apply the common principles
of merchandising. The hired managers of the chain
stores know that they will lose their jobs if they do not
carry out their instructions, while the independent dealer
has no such direct stimulus.
Advertising. — Since the chain store usually has several
stores in one city or trading territory, it can use news-
paper space economically and pays for very little waste
circulation. The large national chains can also employ
Chain Stores
magazine and radio advertising, for they have stores in
many parts of the country.
Location. — The large chain store can employ experts
to select the location for its various stores. The chain
does not have to have a store in any particular place,
and hence will not permit itself to be "squeezed" by
a grasping landlord. The chain frequently studies the
territory carefully and analyzes the value of different
sites before it selects a location.
Cut-price leaders. — Many chains have made their ap-
peal for business primarily on the basis of prices. Very
frequently the chains have selected well-known articles
for leaders and have quoted very low prices on these
goods. The prices on these articles are counted upon
to draw customers to the store who buy other mer-
chandise which carries a larger profit. Many independ-
ent stores, especially large city stores and stores in
cooperative chains, are now also using this method, so
that the chains are losing some of their relative ad-
vantage.
Limitations and disadvantages of chains. — The chains
that operate on a limited service basis lose a certain
amount of trade from people who want to buy on credit,
who want goods delivered, or who want goods not carried
by the chains. The chain has difficulties and expenses
in management. A large organization often has diffi-
culty in keeping all its employees alert and in seeing that
its policies are carried out by all its employees. The
chains must employ supervisors to check the operations
of its various managers. The use of supervisors, spe-
cialists, and experts adds to expense. The experts make
many mistakes; many locations are selected that prove
unprofitable; money is lost in experimenting with new
policies; and some chains have expanded so fast that
Chain Stores 197
they have had to employ poor managers and super-
visors. Sound policy limits expansion to the rate at
which men can be trained for managerial positions.
Hostile public opinion. — Much anti-chain propaganda
has been distributed in recent years. The chains have
been pictured as huge corporations controlled by Wall
Street and taking money out of local communities. It
is said that they do not fully support local enterprises
in the communities where their stores are located; that
they may become monopolies; and that they take away
from young men the opportunities to establish their own
businesses. Several states have enacted discriminatory
chain-store taxes. Oil refiners have sold some of their
filling stations in these states.
The chains answer the argument that they take money
out of the community by pointing out that the inde-
pendent merchant usually purchases his goods from
wholesalers and manufacturers located in other towns.
The only difference is that the chain store takes away
its profit and distributes it to its stockholders who are
often scattered throughout the country. The chain
stores argue that they undersell the independents, so
that the consumer makes a saving by buying at the
chain; and that the money saved is spent in the com-
munity, so that actually more money is spent in the
community because of the chains.
To illustrate, suppose that the independent grocer sells
a staple article for one dollar and sends eighty cents of
this out of the community to pay for the article. His
operating expenses are 18% and his profit is 2%. Pre-
sumably, therefore, 20 per cent is spent in the commu-
nity. The chain store sells this article for ninety-one
cents and sends seventy-nine cents out of the community
to pay for the article. Its operating expenses are
198 Chain Stores
and its profit is 2%. The operating expenses are spent
in the community, but the profit goes to its stockholders
who may live elsewhere. The chain argues that the nine-
cent saving to the consumer is spent in the community,
so that actually 21 cents is kept in the community when
the article is bought at the chain store, whereas only 20
cents is kept in the community if the article is bought
at the independent store. Most communities have stock
and bond holders who receive money from other com-
munities and thus compensate for the profits which local
enterprises may send to outside owners.
In the past there probably was considerable truth in
the statement that the chain stores did not support
community enterprises. In recent years, however, most
of the chains have joined the chambers of commerce and
subscribed to the community chests or other local social
agencies. Local people, however, often feel that the
chains are not yet carrying their full responsibility for
local enterprises.
The chains continue to grow, but as yet no single
chain has become a monopoly, although, as a group, the
chains are dominant in certain trades in certain terri-
tories. It is better to prevent monopolies than to try
to regulate them or divide them up once they are formed.
Although no chain yet has a monopoly, such a monopoly
is possible at some future time. Perhaps this danger
has been in the minds of some state legislators in voting
for discriminatory chain-store taxes. Such taxes have
been enacted in several states. They have forced a few
stores out of business, and may be made to force more
out in the future. Such taxes tend to take away some
of the operating advantage of the chain and thus injure
consumers who want to buy at low prices.
The chains have suffered somewhat from hostile
Chain Stores 199
public opinion and from the feeling of some consumers
that they should buy from home-owned stores. On the
other hand, most consumers apparently believe that the
chains undersell the independents. As long as this is
true, the goodwill of the chains will outweigh their ill-
will.
Conclusions on chains. — Many consumers have un-
doubtedly benefited by the lower prices of the chains.
The price advantage of the chains has apparently de-
creased in recent years as independent stores have im-
proved their methods of buying and increased their
efficiency. It is possible for the independents to operate
their stores just as efficiently as the chains. Some have
felt that the chains have an inherent advantage in being
able to buy their goods cheaper, and national legislation
is urged to prevent such large price discriminations.
The independents, however, arc helping themselves by
the formation of cooperative buying organizations which
enable them to buy more nearly on the same basis as
the chains. Such organizations are discussed in the next
chapter.
Chapter 11
Review Questions
1. What is a chain store? A chain store system?
2. What are the types of chain stores?
3. What can you say of the growth and present impor-
tance of chain stores?
4. In what lines do the chains have the largest volume
of business? Why?
5. In what lines are the chains relatively the most im-
portant? Relatively the least important?
6. How are chains organized?
200 Chain Stores
7. How may the expenses of chains and independents be
compared?
8. What are the chief advantages of chain stores?
9. What advantages do the chains secure from division
of labor and the employment of experts?
10. What advantages do the chains secure from integra-
tion?
11. What is meant by good merchandising? Do the chains
have better merchandising than the independents?
12. How do the chains reduce expenses? Do they have
lower expenses than independent stores handling similar
goods?
13. What advantage does the chain system have in adver-
tising?
14. How do the large chains select locations for their
stores?
15. What use do the chains make of cut-price leaders?
16. What are the chief disadvantages of the chains?
17. What difficulties of management do the chains en-
counter?
18. What arguments are made against the chains by propa-
gandists?
19. What is meant by saying that the chains take money
out of the community? Is this a true statement?
20. What can you say of the argument that the chains do
not support community enterprises?
21. How do the buying prices of the chains compare with
those of the wholesalers?
22. How do the average selling prices of the chains com-
pare with those of the independents?
Thought Problems
1. It has been said that the chain is primarily adapted
to an urban territory and that it loses many of its advantages
Chain Stores 201
when it scatters its stores throughout rural territories. What
is the basis for this statement? Is it true?
2. Is the use of cut-price leaders good merchandising?
It is argued, for example, that every article should make a
profit and that it is wrong to sell an article below cost (ex-
cept, of course, old or soiled goods or goods in which the
dealer is overstocked).
3. What do you think of the arguments that the chain
store is an evil because it takes money out of the commu-
nity?
4. What do you think of the argument that the chain
stores are niggardly and avaricious because they do not sup-
port community enterprises?
5. Should the chains be curbed by legislation? Are they
in the interests of the consumers? Or are they public men-
aces?
6. Is the chain an inherently better type of organization
than the wholesaler-retailer type, or has it grown because it
has been more efficiently operated?
CHAPTER 12
Meeting Chain Competition
What the independent merchant can do to meet chain
competition. — The independent merchants have been
much worried by the continued growth of the chain and
of other large, integrated retail stores. The chains have
three major advantages over the independents: (1) op-
erating efficiency secured through a division of labor and
the employment of specialists and merchandising ex-
perts; (2) advertising; and (3) large buying power,
often combined with the operation of wholesale houses.
Individual action. — What can the independent do to
overcome these disadvantages? He can improve his
efficiency and become a better merchant. He can se-
cure a good location for his store, select his goods care-
fully, display them well, arrange attractive store and
window displays, practice good salesmanship, train his
employees to give cheerful and courteous service, turn
his stock rapidly, keep adequate records, sell for cash or
extend credit carefully, collect his accounts promptly,
and advertise enticingly. If the merchant can do all
of these and besides put his own personality and indi-
viduality into his business, he will have no trouble com-
peting with large retail organizations.
Can the independent retailer do all of these things?
Some do, and grow and prosper right alongside of chain
stores. Others are incapable of doing so. It is hard for
202
Meeting Chain Competition 203
one man to be as efficient in all departments of his busi-
ness as are the specialists employed by the chains. It
takes a good man to meet chain-store competition in-
dividually.
Price leaders. — Many dealers have said that the large
chain and department stores do not undersell them on
all articles, but only on their specials or cut-price leaders.
Many independent merchants have therefore adopted
cut-price leaders to attract customers to their stores and
to give the consumers the idea that their prices are as
low as those of the chain stores. Some independent
merchants seem to have used specials to very good ad-
vantage, even though they could not always buy them
as cheaply as their large competitors. The danger is
that they will lose more on the leaders than they will
make on the increased sales of other goods. The inde-
pendents are also often handicapped in advertising their
cut-price leaders to the public.
A survey of grocery advertising in 111 New England
newspapers found 28 products advertised by both the
large chains and the independents. The independents
had the same prices as the chains in 41 per cent of the
advertisements, lower prices in 36 per cent of the ad-
vertisements, and higher prices in 23 per cent of the
advertisements.1
Service. — Some independents have felt that the chains
secure most of their advantage from operating on a cash-
carry basis, and that the way to meet chain-store compe-
tition is to operate on the same basis. This has been
successful in some instances, but in many cases it has
not enabled them fully to meet chain-store prices. Other
1 Independent stores both in and out of cooperative chains were
included.
204 Meeting Chain Competition
independents have felt that the best way to meet chain
competition is to emphasize credit and delivery service
and to give careful attention to the needs and wishes
of their customers. No generalization can be made as
to which is the better method. Local conditions, the
type of customers, and the dealer's own ability are
probably the determining factors.
Collective action. — Although the independents can do
much individually to meet chain competition, they can
do more cooperatively. They were very slow in learn-
ing how to cooperate, but much progress has been made
in cooperative ventures during the past few years. Col-
lective action may lead to cooperative advertising; to
the employment of merchandising specialists or experts;
to research; to cooperative buying; and to the operation
of wholesale houses by the retailers.
Advertising. — A common form of cooperative advertis-
ing is that done by retail grocers in various localities.
Such advertisements generally feature certain cut-price
specials used to meet the prices of the chain stores.
These leaders are often sold at or near cost and in many
instances are supplied by the wholesalers at cost. The
advertisement may feature two lists of articles : first, the
leading specials (usually 4 to 8 articles) sold at cost;
and second, articles which are good values, but which
carry at least small margins.
Many of the retailers are unable to utilize newspaper
advertising individually, owing to the small portion of
the town from which they draw their trade. A number
of stores located in different parts of the city may, how-
ever, be able to use newspaper space very advantage-
ously. In many cases, the advertising retailers operate
on a service basis and feature this service in their ad-
Meeting Chain Competition 205
vertising. They may also point out that the stores are
all "home owned" and ask for trade on this basis. A
part of the cost of the advertising is often paid for by
manufacturers whose products are featured.
In some cities, an organization may not have stores
in all parts of the city, and so cannot economically utilize
the daily papers. In such cases, they may use handbills,
direct-mail matter, or window signs supplied by the as-
sociation or wholesaler.
Supervision. — Many cooperative groups of retailers
employ trained specialists to help the retailers improve
their methods and to become better merchants. These
specialists may prepare window displays, store layouts,
accounting systems, or copy for advertisements. They
may visit the stores and give advice to dealers. The
weakness of such supervisors is that they can only give
advice, whereas the supervisors in the chains give in-
structions. Many of the independent retailers do not
follow the advice offered by the supervisors. On the
other hand, the chain-store manager who does not fol-
low instructions is likely to lose his job. In the whole-
sale type of cooperative chain, the salesmen for the
wholesalers are often expected to act as supervisors.
These men are primarily salesmen and often make poor
supervisors.
Research. — Because many of the stores are too small
to afford research departments and because much valu-
able information must be secured from a large number
of stores, several groups of retailers carry on research
work cooperatively. Cooperative research may follow
style trends, may analyze past sales, may compile figures
showing operating costs, may develop stock control
methods, may develop methods of selecting or training
206 Meeting Chain Competition
employees, or may compile other facts useful to the
stores.2
Buying. — Perhaps buying is the most important coop-
erative activity among independent retailers at present.
Many feel that the large buying power is the greatest
advantage of the chain.
Types of organizations. — Some of the more important
types of organizations are buying clubs, cooperative
chains, and buying groups. Cooperative, or voluntary,
chains may be organized by retailers or by wholesalers.
The retail type of cooperative chain may buy goods
jointly through some form of a buying club, may buy
from a mutual wholesaler, or may own and operate its
own wholesale house. The wholesale type is usually
organized by a private wholesaler, or by a national or-
ganization which works through private wholesalers in
various parts of the country.
The buying club. — For many years, groups of retailers
have cooperated to secure quantity prices. The manu-
facturer may offer a quantity price on fifty cases. One
dealer may be unable to use such a large quantity. He
therefore calls other dealers in his town and arranges
with them to pool their orders so that they can get the
quantity price. A buying club, however, is more than
this. It usually has a formal organization and pools
orders for its members more or less regularly. The re-
tailers in the club jointly, or through a buying com-
mittee, select the articles upon which lower prices can
2 Research is carried on by groups of both small and large stores.
The Retail Research Association and the Cavendish Trading Corpora-
tion are examples of research organizations maintained by groups of
large department stores, and the National Retail Hardware Associa-
tion is an example of an organization with a research department
maintained by a large number of small stores,
Meeting Chain Competition 207
be obtained by buying in larger lots. They may secure
quantity prices from wholesalers, or they may buy from
manufacturers, farmers' cooperative associations, or
brokers.
One member often places the order for the goods. He
may keep the goods in his store until the members call
for them or the members may call for them at the
freight station. All the buying may be done by one
member or may be done in rotation by the various mem-
bers. When done by one member it may place a serious
burden on him, for many of the retailers do not call for
their goods promptly. In some cases they do not have
the money, and either leave the goods until they get
the cash or ask the buying member to trust them for
a few days. The only way to be safe on pooled orders
is to require the retail members to make cash deposits
when the order is placed.
At times the buying club develops so that a part-time
paid secretary is employed. In some instances the sec-
retary may keep a limited quantity of goods on hand
or even make deliveries to the stores of the members.
In this case it has begun to operate a wholesale house.
The buying club attempts to secure wholesale prices
without incurring the expenses of operating a wholesale
house. It is very difficult to do this except on a limited
number of purchases. The successful buying club may
therefore decide to secure and operate a wholesale house.
Retailer-owned wholesale house. — There has been a
considerable growth of retailer-owned wholesale houses.
There are a hundred or more in the grocery field, about
a score in the drug trade, and some half dozen in the
hardware field. In such houses the retailers own the
stock and elect the managers. Such houses are usually
208 Meeting Chain Competition
operated on an economical basis, employing few sales-
men. Among grocery houses only one-fifth report the
use of salesmen.
The retailers send in their orders by telephone or by
mail. • These wholesale houses usually carry more or less
limited stocks of goods, sell for cash or offer short credit
terms, and give a limited delivery service. In these
ways they reduce their operating expenses very materi-
ally. A government study shows that the average re-
tailer-owned wholesaler in the grocery trade operated
on an expense of 4.1 per cent; this compares with ex-
penses of 5.5 per cent for private cash-carry wholesalers
and over 9 per cent for private wholesalers operating
on a service basis. The private hardware wholesaler is
said to have expenses of from 15 to 20 per cent, while
the retailer-owned house operates on an expense of 8
to 10 per cent. In the drug trade the average expenses
of the retailer-owned house are about 8 per cent, com-
pared with about 16 per cent for private service whole-
salers. A government study showed that in the grocery
trade the average retail member purchased $6,191 worth
of goods per year from his wholesale house; of this total
27 per cent was purchased on a credit basis and 25 per
cent was delivered to him free.
It is evident from the above figures that the retailer-
owned wholesale house can materially reduce the prices
to its retail members. It, however, does not offer them
as much service as the private service wholesaler. The
retailers must send in their own orders, must pay for
the goods more promptly, and often must haul them to
their stores or pay for delivery. It is also at times im-
possible to secure all of the goods needed from such
wholesale houses.
Very often cooperative chains are operated in con-
Meeting Chain Competition
209
nection with the retailer-owned wholesale houses. The
retailers may select price leaders, which are then adver-
tised cooperatively; they may have uniform store fronts;
and the organization may supply its members with
Chain Store
Trade Channel
Near-Chain
Trade Channel
KEY: M— Manufacturer ; R— Retailer; Mu.W.— Mutual Wholesaler;
RO.W.— Retail-Owned Wholesale House; C— Consumer;
C.W.— Chain Store Warehouse
Fig. 19. — Chart illustrating how the co6perative chain and the
mutual wholesaler attempt to secure the same advantage as is
secured by the chain store in eliminating the wholesaler's sales-
men and their expense. Note that wholesaler's salesmen are elimi-
nated as is done by the chain store and that the wholesaler serves
much the same purpose as the chain store warehouse.
merchandising helps, plans for store arrangements, win-
dow displays, and advertising copy.
Disadvantages of the retailer-owned wholesale house.
— An important disadvantage of the retailer-owned
wholesale house is that it is managed by hired employees,
although the retailers devote a part of their time to its
supervision. The retailers either must take this time
210 Meeting Chain Competition
away from their retail stores or neglect the supervision
of the wholesale house. This management difficulty
appears to be a more or less inherent disadvantage of
all cooperative ventures. It is also hard to keep up the
interest and cooperation of the members, and energy
must often be devoted to securing new members. Owing
to their limited capital, some retailers find it hard to
buy stock in the wholesale house.
Mutual wholesalers. — The operation of mutual whole-
salers was described in Chapter 7. They operate much
as do the retailer-owned wholesale houses, and in prac-
tice it is often difficult to tell whether a wholesale house
is mutual or a retailer-owned wholesaler. The difference
is that the majority of stock in a mutual house is owned
privately and not by the retail members. The control
is thus, strictly speaking, in the hands of a private or-
ganization.
Wholesaler-retailer cooperative chains. — The whole-
saler-retailer cooperative chains, or as they are some-
times called, vendor-tie-ups, have been organized by
private wholesalers. Such organizations have had their
largest growth in the grocery trade. Most of these
chains have been started since 1925.
The wholesalers usually maintain their outside sales-
men, extend credit, and give free delivery to many of the
retailers. It is apparent from this that they reduce
operating expenses little, if any. Their services to their
retailers often consist in providing price leaders at a
cost low enough to allow the retailers to meet chain-
store prices; cooperative advertising; advice given by
their salesmen or by merchandising specialists; and the
privilege of using their name. The cooperative adver-
tising and price leaders are apparently the greatest ad-
vantages to the retailer. The cooperative chain
Meeting Chain Competition 211
sponsored by the wholesaler lays much more emphasis
on selling the idea than does the chain sponsored by the
retailers. This perhaps explains its rapid growth in
spite of the fact that it apparently does not supply the
retailer with goods as cheaply as does the retailer-owned
house. A government study covering approximately
fifty of such group shows the average sales of the whole-
salers to be approximately $2,000,000, of which about
one-half was made to members of the cooperative chain
and about one-half to other retailers. The average sales
to retail members was $6,767, of which 80 per cent was
sold on credit, 17 per cent was sold on a cash-carry basis,
and 53 per cent was delivered free to the retailers.
Importance of cooperative chains in the grocery trade.
— The Federal Trade Commission estimated that in 1929
there were 395 cooperative, or voluntary, chains in the
grocery trade, with a membership of 53,400 independent
retail grocers. There were, in comparison, 788 corporate
chains with 53,500 stores. The average sales of the
cooperative stores were $12,000, compared with $54,000
for chain stores. The average chain store was thus four
and one-half times as large as the average store in a
cooperative chain. The number of retailers who were
members of cooperative chains has grown very fast in
recent years. The American Institute of Food Distri-
bution, Inc., reported nearly 800 cooperative chains in
1935 with 104,000 members; this was double the number
of stores operated by grocery chains. It may be esti-
mated that these cooperative chains do nearly two-thirds
as much business as the corporate chains.3 The coopera-
tives appear to be growing faster than the chains. It
appears that there may soon be only three types of
3 The American Institute of Food Distribution, Inc., however, claims
that these cooperatives do as much business as the corporate chains.
212 Meeting Chain Competition
independent grocery retailers: those in cooperative
chains; those operating large markets who are large
enough to buy on favorable terms; and those operating
small neighborhood stores who exist because of their
convenience to the people in their immediate neighbor-
hoods or because of their low operating expenses and
the small returns which they receive for their time.
Prices. — We may assume that the wholesale houses of
the cooperatives buy as cheaply as other wholesalers.
As indicated in the preceding chapter, this would mean
slightly higher cost prices than those obtained by the
chains. It would appear that the low expenses and
margins of retailer-owned wholesale houses would enable
the retail grocers to secure goods from them for 5 to 6
per cent less than from service wholesalers, and perhaps
for 1 to 2 per cent less than from cash-carry and mutual
wholesalers. Some of the wholesalers who sponsor chains
have reduced their expenses sufficiently to enable them
to give their retailers somewhat lower prices. Others
who have retained their salesmen and offer the retailers
merchandising assistance have not decreased their ex-
penses, and so appear to be able to offer their retailers
little price advantage.
Very few data are available showing comparative re-
tail prices to consumers offered by cooperative chains
and other types of retailers. The fact that the chains
show relatively little price advantage over the inde-
pendents in some of the larger cities 4 may be due to the
fact that the retailers there have long had cooperative
buying organizations. Four recent studies in the mid-
west have compared the prices of cooperative grocery
chains with those of other independents. In two of these
1 For example, Philadelphia, New York, and San Francisco.
Meeting Chain Competition 213
studies, the cooperatives were shown to have lower prices
than other independents but not as low as those of the
chains. In the other two studies, the cooperatives were
shown to have somewhat higher prices than other inde-
pendents. These higher prices were apparently caused
by the fact that the cooperatives rendered more services
than other independents.
Cooperative drug and hardware chains. — Estimates
for 1929 showed over 30 cooperative drug chains, with
some 12,000 members whose sales were less than 5 per
cent of the total sales of all drug stores. There were a
half dozen or more cooperative chains or retail-owned
wholesale houses in the hardware trade, but the total
sales of their members were less than 1 per cent of the
total hardware sales in the country. Cooperative chains
in these fields have devoted most of their attention to
buying goods for the retailers at low prices and relatively
less attention to giving advertising and other merchandis-
ing assistance to their members. The available figures
indicate that the wholesale houses were able to save the
retailers over 6 per cent in the drug field and 10 per cent
in the hardware field. These were larger savings than
were realized in the grocery field. In spite of these
greater savings the cooperatives have grown relatively
less than those in the grocery field. The explanation is
that chain competition has been less severe in these
fields, and that the retailers dislike to give up any of
their freedom in operating their businesses. Much is
heard of cooperation in these fields, and as chain competi-
tion becomes more severe, more cooperation among re-
tailers may be expected. It would seem to be desirable
for the independents to organize cooperative chains in
advance of the growth of corporate chains and so pro-
tect their position. However, people don't seem to work
214 Meeting Chain Competition
that way — they hesitate to make changes until competi-
tion forces them to.
Group buying. — A buying group is a group of stores
or manufacturers which selects merchandise jointly and
places the orders together. In the retail field, group
buying is most commonly practiced by department,
clothing, and furniture stores.
There are two advantages to group buying: better
selection of merchandise through the combined judg-
ment of a number of buyers, and quantity discounts or
prices by placing large orders. The main limitations of
group buying are the differences in the needs of different
stores and the difficulty of getting the various buyers to
work together. If the stores in a group cater to different
classes of trade, it will be difficult to buy merchandise
jointly. Members of a buying group are commonly lo-
cated in different towns, and, with style merchandise,
the stores in different towns may have different fashions
at a given time. Fashions, however, are becoming more
uniform through the country, and it has been demon-
strated by the chain stores and by several buying groups
that popular priced women's wear and men's apparel
can be bought collectively. Group buying is said to be
particularly important to the department stores located
in the smaller cities and in the outlying shopping sections
of the larger cities. These stores are often too small to
secure the most favorable quantity prices and may not
have expert buyers for all types of merchandise handled.
The personal factor of tens limits group buying : buyers
may fear the loss of their prestige or of their positions
and so oppose cooperative buying.
Selection of goods. — Some stores report that the joint
selection of merchandise is the principal advantage of
group buying. The judgment of several buyers is better
Meeting Chain Competition 215
than that of an individual. Of course, if the buyers make
their selections hastily, poor merchandise may be chosen.
The buyers meet to inspect the samples and to select
the best values offered. The reliability of the manufac-
turers and their ability to deliver the quantities wanted
by the group must also be considered. It has been
thought by some that the group tries merely to get the
lowest price possible. Such a practice is bound sooner
or later to lead to a cheapening of the merchandise, and
to avoid this danger groups may start with a definite
price and select the best merchandise that is offered at
that price.
Lower prices. — The group may be able to secure lower
prices. For example, a dress which has been retailing at
$15.75 and which was purchased at $10.75 may, by the
larger purchases, be bought for $10. This 75 cents may
be kept to increase the retailers' profits, or it may be
passed along to the consumers in lower prices. One
large department store had been buying a certain type
of screen in lots of 1,000 dozen and getting 10 and 5 per
cent discounts off the manufacturer's price.5 Other stores
in the group were getting 10 and 2 per cent, and 7 and 5
per cent off. As a result of the group activity, better
prices were obtained, particularly by the smaller stores
in the group. Savings of from 5 to 12 per cent are
mentioned as possible through group buying. A group
of women's coat and suit manufacturers were found by
the U. S. Department of Commerce to give average dis-
counts of 4.4 per cent to buying groups.
When first organized, buying groups commonly went
6 Trade discounts are deducted in succession, so that each one ap-
plies to the net amount after the preceding one has been deducted.
Thus if an article is priced at $10, with 20, 10, and 5 per cent off, the
buyer pays $6.84 ($10 — 20% = $8; $8 — 10% = $7.20; $7.20 — 5% =
$6.84).
216 Meeting Chain Competition
to the manufacturers and asked for a special price on a
certain quantity of goods. The order was placed on the
basis of the quoted price. If all goods were for immedi-
ate delivery, the manufacturer might be rushed to make
delivery and then find business very slack. When de-
liveries were made over a period of time, it often
happened that the member stores did not buy as much
as they had promised when the order was placed — a
practice which was unfair to the manufacturers, who
naturally felt they had been cheated. To avoid this
difficulty another method was developed. The buying
group selects what are called preferred resources of
supply — manufacturers with whom the buyers are to
place all possible business. The manufacturers agree to
give a sliding scale of discounts based on the total quan-
tity purchased by members of the group during a given
period. For example, a manufacturer of men's clothing
may agree to give the following discounts to members of
a group on purchases made during a six months' period :
5 per cent on sales of $100,000; 7 per cent on sales of
$200,000; and 10 per cent on sales of $300,000. The
manufacturer is thus enabled to operate his plant more
regularly. The stores obtain the merchandise as needed
and still receive quantity discounts based on the total
purchases of all stores in the group.
A considerable development in group buying has
taken place, although the total quantity of goods in the
apparel field bought in this way is estimated to be less
than 10 per cent. Some groups report their greatest
success in buying supplies (for example, wrapping paper,
boxes, twine, excelsior, tires, and gasoline) and such
staples as sheets, towels, and kitchen ware.
A recent report listed 17 important buying groups in
the department store field with 500 stores as members.
Meeting Chain Competition 217
This included some ownership groups or chains of de-
partment stores which do not have central management
but which do buy some goods cooperatively as groups,
and some small chains of department and apparel stores.
The total sales of the stores in these groups were given
as $1,700,000,000. If 10 per cent of their total purchases
is made jointly, the total volume of joint purchases
would be $170,000,000. There are also many smaller
buying groups.
Other forms of collective action. — Retailers often
cooperate in other ways. In several towns they have
organized cooperative delivery systems. Under such a
system one organization supplies the trucks and makes
all deliveries for the retailer members.
In more than 1,000 cities and towns the retailers co-
operate to gather credit information to be used in ex-
tending credit to the consumers. In a very large
proportion of these cities , the retailer-owned credit
bureaus operate collection agencies to make collections
from slow accounts.
Chapter 12
Review Questions
1. What three major advantages do the chains have over
the independents?
2. What can the independent merchant do individually
to meet chain competition?
3. Can the independent merchant merchandise his store
as efficiently as the chain?
4. What use can the small independent merchants make
of price leaders?
5. What can the independents do collectively to meet chain
competition?
218 Meeting Chain Competition
6. What important types of organizations have been
formed to help the independents?
7. How can the independent retailers advertise collec-
tively?
8. Can the independents secure trained specialists to help
with the supervision of their stores? If so, how? If not,
why?
9. How may independents cooperate to carry on research?
10. How do retailers cooperate to buy merchandise?
11. What is a buying club? How does it operate?
12. What advantages may the retailers secure from a buy-
ing club?
13. What are the limitations on the activities of a buying
club?
14. What is a retailer-owned wholesale house? How are
such houses owned? How are they managed?
15. What services do retailer-owned wholesale houses usu-
ally perform? How do they limit expenses?
16. How do the expenses of retailer-owned wholesale houses
compare with the expenses of private wholesalers handling
similar goods?
17. What advantages does a retailer obtain from buying
from a wholesale house in which he is part owner?
18. What are the disadvantages of buying from a retailer-
owned wholesale house? Can the retailer secure all of his
goods from such a house?
19. What is a mutual wholesaler? Compare and contrast
the mutual wholesale house with the retailer-owned house.
20. What is meant by a wholesaler-sponsored cooperative
chain?
21. How are such cooperative chains organized? What
are their advantages to the wholesaler? To the retailers?
22. What are the relative advantages to the retailer of
Meeting Chain Competition 219
belonging to a cooperative chain organized by retailers and
of belonging to one sponsored by a wholesaler?
23. What is meant by group buying? Among what types
of stores does it exist?
24. What are the advantages of group buying to the re-
tailers?
25. What are the disadvantages or limitations of group
buying?
26. In what other ways than those already discussed may
the retailers cooperate to further their interests?
Thought Problems
1. Can an independent retailer in the grocery field meet
chain-store competition acting individually? If so, how?
If not, why? Would your answer be different for retailers in
other trades?
2. Should the independent retailer trying to meet keen
chain-store competition go on a cash-carry basis or emphasize
credit and delivery service?
3. What use can the independents make of price leaders
in meeting chain-store competition when acting alone? When
acting together with cooperative advertising? How do the
independents secure goods to be used as leaders? Can they
meet chain-store prices on cut-price leaders? It is said that
the public compares prices only on a few staple or standard
articles, and that if the independents meet the chain prices
on these, the public will think they are as cheap on other
articles. Comment on this statement.
4. One difficulty with cooperative advertising is that the
same articles do not appeal to the customers of all the stores,
A low-quality article may not appeal to a retailer with a
high-class trade, while a high-quality article may be unat-
tractive to a dealer with a low-class trade. Comment. How
should the articles to be advertised as leaders be selected?
Is it necessary that all cooperating dealers have the adver-
tised articles in stock? Is it necessary for all stores adver-
220 Meeting Chain Competition
tising cooperatively to operate on the same basis — cash-carry
or credit-delivery?
5. Do the cooperative, or voluntary, chains have all the
advantages of ownership chains? Can you enumerate any
places where they are superior to the chains? Any places
where they are inferior? Will they enable the independent
retailers to hold their own against the chains?
CHAPTER 13
Marketing Industrial Goods
Industrial goods. — Industrial goods are goods used in
the production or distribution of other goods and serv-
ices. They are sold principally to such business concerns
as factories, railroads, mines, public utilities, and offices.
They are bought for use in business and not for con-
sumer-satisfaction. Many of the buyers are expert
judges of the quality of the goods purchased. The de-
mand for industrial goods varies much more than the
demand for consumers' goods. Equipment is most often
replaced when business is good and the manufacturers
are prosperous. When sales are increasing, the manu-
facturers erect buildings and buy new equipment; when
sales are declining, little money is spent for new build-
ings and equipment. In 1929 industrial sales totaled
41 billion dollars. Such sales declined greatly in the
following three years. To illustrate the extent of the
decline, the sales of wholesale establishments selling
machinery and equipment declined from 3 billion dollars
in 1929 to 1.3 billion dollars in 1933— a decline of 58.6
per cent.
Kinds of industrial goods. — There are many kinds of
industrial goods — lathes, drills, looms, steam shovels,
locomotives, ships, tractors, trucks, filing cabinets, time
clocks, bookkeeping machines, dynamos, engines, tur-
bines, oil, iron, steel, ores, wool, wheat, cotton, copper,
tin, lead, hides, leather, and so on. Many farm products
221
222 Marketing Industrial Goods
are raw materials and hence industrial goods. For prac-
tical reasons, however, the marketing of farm products
is considered separately.
In Chapter 4 industrial goods were divided into equip-
ment, supplies, raw and partly finished goods, and fabri-
cated parts.
Overlapping with consumers' goods. — Many products
are both industrial and consumers' goods. Flour sold to
a bakery is an industrial goods (raw material), while
flour sold for domestic consumption is a consumer goods.
Lubricating oil sold to factories is an example of in-
dustrial goods, while the same oil sold at retail for use
in a pleasure car is a consumers' goods. The consensus
of opinion is that when a seller's product is sold to both
markets, two sales organizations should be maintained.
The type of salesmen needed and the problems in the
two markets are different.
Equipment. — There are many types of equipment.
Some equipment is highly specialized and some is fairly
well standardized. Some pieces, like rolling mills, loco-
motives, blast furnaces, and turbines, are very large;
others, like hand tools, are small. Equipment may be
roughly divided into two classes: large machines that
are built to order for the buyers, and smaller devices that
have a wide market and that are commonly built in
quantities and carried in stock ready for delivery by the
makers or dealers.
Equipment has a relatively long life and is often ex-
pensive; replacements come at infrequent intervals.
The purchase of new equipment is a matter of great
importance to the buyer, and new capital or long-time
credit may have to be secured.
Obsolescence. — The value of equipment depends pri-
marily upon its design and construction. Since new de-
Marketing Industrial Goods 223
vices are constantly being developed and old designs are
constantly being improved, equipment is often made
obsolete by new inventions. New designs reduce the
amount of labor required, increase the speed of produc-
tion, improve the quality of the goods produced, or save
raw materials or fuel. Old equipment may be junked
or sold to- smaller plants long before it is worn out. It
is wasteful and expensive to keep old machinery in use
when newer machinery will reduce the cost of produc-
tion.
The buyers. — Specialized products have a definite
number of users. For example, looms are used only by
textile mills, and dynamos are used only by concerns
that generate electricity. Producers of such goods have
a very definite market. Sales depend upon the replace-
ment of worn out or obsolete machinery, the expansion
of old plants, and the building of new plants. The
sellers can keep in touch with the present users through
salesmen, trade papers, and direct-mail advertising.
Building contracts, trade gossip, and the incorporation of
new companies may give news of new plants.
On the other hand, some equipment is used by a great
variety of business concerns. Motor trucks are used by
different types of factories, mine operators, contractors,
public utilities, wholesalers, retailers, trucking com-
panies, and farmers. Hand trucks are used by many
types of factories, warehouses, wholesalers, railroads, and
hotels. Time clocks may be used by any concern with
a large number of employees. The maker of such
products has many types of potential customers. He
may advertise in different trade papers and in magazines
with general circulations. His salesmen may have many
prospects in a given territory.
224 Marketing Industrial Goods
Sales methods. — The manufacturer of equipment may
sell his goods direct to the users or he may reach them
through distributors who may be either merchants or
agents.
Producers of specialized equipment that is built to the
order of the buyers usually have their own salesmen and
sell direct to the users. Agents may, however, be used
as scouts to watch for the building of new plants or the
re-equipment of old ones. When machines are built to
the buyer's specifications, it would seem that the order
would go to the lowest bidder. This is not always the
case, however, for other factors may be considered. The
reputation of the seller is important. The salesman may
help to design the equipment or plant and so may secure
an advantage. Friendship, promptness of delivery, re-
pair service, guarantee, credit, and reciprocity are also
important factors.
Small equipment that is used in many different trades
may be sold direct to the users by the manufacturers or
may be sold through middlemen. If the product is new,
so that intensive sales effort is required, the manufac-
turer is likely to do much of the selling. When the
product is well established, it may be sold by middlemen,
but even then the manufacturer may have his own sales
organizations in large markets. In such markets the
manufacturer often carries stocks and makes immediate
delivery to users. He often operates service stations to
repair his products.
Types of middlemen. — There are two types of middle-
men who handle equipment — agents and merchants.
The manufacturer's agent makes sales on a commission
basis. He turns his orders over to the manufacturer who
fills them, and he carries little or no stock and extends no
credit to the buyers. He generally handles only a few
Marketing Industrial Goods 225
products, which may be highly specialized or compli-
cated. The figures in Table 23 show the business done by
various types of middlemen handling five kinds of indus-
trial goods (see pages 226-227).
There are several types of merchants handling equip-
ment— mill supply houses, machinery dealers, hardware
jobbers, electrical jobbers, plumbing jobbers, railway
supply houses, automotive jobbers, steel jobbers, and
others. These dealers carry goods in stock ; have outside
salesmen ; and may extend credit, make collections, and
issue catalogs. Some carry specialized equipment
adapted only to certain industries, such as metal work-
ing machinery, wood working equipment, oil well sup-
plies, railway supplies, or mine supplies. Others handle
equipment that has a relatively wide use. The hardware
jobber often carries mechanics' tools, equipment for small
machine shops, and saw mill supplies. The electrical
jobber carries many tools and small machines used by
electrical manufacturers and contractors.
Supplies. — Operating supplies are goods that are used
up in the operation of the plant but that do not become
a part of the finished product. Goods with a short life,
such as typewriter ribbons or electric light bulbs, may
be classed as supplies, while goods with a relatively long
life, such as printing presses, are classed as equipment.
Examples of operating supplies are coal, gasoline, fuel
oil, lubricating oil, .wrapping paper, twine, and printed
forms. Some of these products are very important to the
buyers and are purchased carefully by responsible execu-
tives. Others are of relatively little importance and are
bought by an assistant or clerk in the purchasing de-
partment.
Coal. — Coal is perhaps the most important operating
supply. It furnishes the power for most of our factories,
226
Marketing Industrial Goods
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Marketing Industrial Goods
electric and gas plants, mines, railroads, and other public
utilities, and it heats most of our buildings. The main
competitive products are natural gas, petroleum, and
water power. During the past 15 years, the increased
efficiency of power equipment and the development of
oil and gas wells and water power have cut deeply into
the market for coal. Twenty-five years ago, it required
6 pounds of coal to generate one kilowatt hour of elec-
tric current. Today it requires less than 2 pounds, and
some of the best stations use only one pound.
We produce approximately 500,000,000 tons of bitu-
minous coal a year. The two largest producing fields
are: the Appalachian, extending from Pennsylvania to
Alabama; and the Eastern Interior, in Illinois, Indiana,
and western Kentucky. Coal is also mined in some ten
states west of the Mississippi River. There are some
10,000 bituminous coal mines, with a capacity greatly in
excess of present demand. Competition is keen and
prices are often low, and as a result many of the mines
operate only a part of the time.
Bituminous coal is used as follows : factories and mills,
32 per cent; railroads, 28 per cent; coke and gas plants,
15 per cent; heating homes and other buildings, 10 per
cent; public utilities, 7 per cent; export, 4 per cent;
coal mines, 2 per cent; and ships, 2 per cent. Coal is
used as a raw material for the production of coke, gas,
coal, tar, ammonia, and other products. It is predicted
that we will extract our motor fuel from coal when our
oil supplies are exhausted. This is already being done
in Germany and England and may be done in this coun-
try within 20 years. If the demand for coal is to be
increased, it appears that larger markets as a raw ma-
terial will have to be found.
From 75,000,000 to 100,000,000 tons of anthracite coal
Marketing Industrial Goods 229
are produced annually in northeastern Pennsylvania.
Most of it is consumed in the northeastern portion of the
United States as doniestic fuel.
Quality of coal. — There are many different kinds and
qualities of coal. Perhaps the most common measure of
its quality is the amount of heat which it contains. This
is ordinarily expressed in b.t.u.'s — British thermal units
(a unit is the amount of heat necessary to raise the
temperature of one pound of water one degree Fahren-
heit). The buyer may buy the coal that shows the
lowest cost per b.t.u. delivered at his plant. There are,
however, other factors to be considered. Transportation
facilities from the mine are important to insure a steady
supply. A high ash content is objectionable if the dis-
posal of ashes is expensive. When traveling grates are
used, the ash should have a high fusing point so that it
will not form clinkers and clog the grates. A high vola-
tile content is desired for making gas, but on the other
hand, a coal with a high volatile content is bad for
furnaces with small combustion chambers — as the vola-
tile matter will be incompletely burned and result in
smoke. Sulphur in the coal is objectionable for making
coke. Sulphur and a high moisture content are objec-
tionable when the coal is to be stored in the air.
From these statements it can be seen that the selection
of the best coal for one's particular needs is not always
easy. Large buyers may use the services of fuel engi-
neers or chemists. Smaller users can employ the serv^
ices of outside chemists or research laboratories, or get
helpful advice from wholesalers.
Marketing coal. — Coal has a low value per ton. The
cost of transporting it from the mine to the consumer is
often more than the cost of the coal at the mouth of the
mine. Some 20 per cent of the bituminous coal is con-
230 Marketing Industrial Goods
sumed by large railroads and other companies that own
their own mines. The other 80 per cent is sold to in-
dustrial consumers and retail coal dealers by the mine
operators' salesmen, wholesalers, and brokers. Coal is
sold for immediate delivery and on contracts for future
delivery. Mine operators are often willing to accept
future contracts at prices little more than the cost of
production, as such contracts assure more or less steady
operation of their mines.
Sales methods. — The larger mines very often maintain
their own salesmen to dispose of their output. An opera-
tor's sales organization may also sell coal produced by
other mines.
Wholesalers. — Coal wholesalers buy coal to sell at a
profit. They have title to the coal, but few of them,
except those receiving it by water, handle it physically.
It is usually delivered to the buyers by the railroads,
and selling is the principal function performed. Whole-
salers claim that they render valuable services to the
buyers by giving them advice as to the kind of coal they
should purchase. They are said to handle more than 20
per cent of the coal.
Sales agents. — Sales agents or brokers sell coal on a
commission basis for the mines and do not have title to,
nor handle, the coal. A sales agent commonly repre-
sents from 10 to 20 mines. The rate of commission
varies widely but is said to average about 8 per cent.
Studies made a few years ago showed that selling agents
sold more than one-half of the anthracite coal and one-
third of the bituminous coal. The data in Table 23,
on pages 226 and 227, show that the various types of
agents handled 40 per cent of all the coal handled by
middlemen in 1933.
Marketing Industrial Goods 231
Raw and partly finished goods. — There are several
types of raw materials: first, those that have come from
the farm, mine, forest, or ocean and have not been
changed in any way except that necessary to harvest,
mine, or catch .them. In this class come such products
as cotton, wool, grain, livestock, tobacco, broom corn,
ores, logs, nuts, raw furs, barks, shells, and roots. Second,
there are products that have gone through one or more
manufacturing processes but that must be further manu-
factured before they are ready for consumption. In this
group are such products as iron, steel, tin, zinc, copper,
hides, leather, thread, lumber, and crude chemicals.
Raw materials are often standardized and dealt in on
exchanges or sold at auction. Often they have market
prices that are widely published and their sale is often
made on a basis of price, quality, and delivery. Prices
fluctuate widely and considerable risk is involved in
carrying them in stock. When a future market exists,
the risk of changes in prices can be largely shifted by
hedging. Raw materials have known prices and can be
sold quickly, and they are therefore good security for
loans. Raw materials are subject to less risk from
obsolescence than most other types of goods; the style
of the finished product may change, but it is likely to be
made from the same raw materials.
Steel. — Steel will be used to illustrate the marketing
of a partly manufactured good. Steel is a finished
product to the steel mills but is considered a raw ma-
terial by its buyers. Steel is made from iron, which in
turn is made from iron ore, coke, and limestone. Most
of the iron ore is mined near Lake Superior, and most
of the steel mills are located in the Pittsburgh district in
western Pennsylvania and eastern Ohio, and along the
232 Marketing Industrial Goods
shores of Lake Michigan and Lake Erie. Other impor-
tant producing areas are near Birmingham, Alabama,
and along the Atlantic seaboard in Maryland and Penn-
sylvania. Some steel mills produce crude products, such
as billets, bars, and plates. Others turn out more nearly
finished products, such as wire, nails, pipe, shafts, rails,
tin plate, sheets, and structural steel shapes. Omitting
scale and scrap, we find that about 96 per cent of the
steel is rolled and about 4 per cent is made into castings.
The largest consumers of rolled steel are automobile
manufacturers, building contractors, railroads and other
public utilities, manufacturers of machinery, farm im-
plements, and cars, and operators of oil and gas wells
and mines.
The steel mills have a productive capacity that is
greatly in excess of the demands in normal times. Even
in busy years like 1929 the mills seldom operate at full
capacity. Because of the concentration of the business
in the hands of a few large companies, however, this
over-capacity does not cause the price fluctuation that
exists in the bituminous coal industry.
Marketing methods. — Many buyers want steel of a
definite chemical content, and much steel is made to
meet their specifications. The mills, however, make
standard grades of steel which are carried in stock for
prompt delivery.
A large amount of steel is sold on future tonnage con-
tracts, under which the buyers place orders for stated
quantities to be delivered in future months. They give
the mills specifications as to the sizes desired in time to
allow the mills to roll the steel for delivery. These future
contracts are really options, however, for the buyers
often cancel them if prices drop.
Since steel is heavy, freight is an important factor in
Marketing Industrial Goods 233
its delivered cost to the buyer. Prices are usually quoted
to apply at certain basing points. The buyers pay the
freight from the basing points whether or not the sellers
are located there.
Steel mills maintain sales organizations and sell most
of their output direct to the consumers. Some steel,
however, is sold by jobbers.
Steel jobbers. — Jobbers sell approximately 10 per cent
of the steel. They carry goods in stock for immediate
delivery and are patronized by small users who buy in
less-than-carlots and by large users who want goods
quickly.1 They normally charge somewhat higher prices
than the mills but must keep the supply and demand
factors, as well as their costs, in rnind when naming
prices.
Fabricated parts. — Manufacturers of fabricated parts
sell to other manufacturers. In order to build markets,
they often advertise to the consumers of the finished
products and try to secure consumer demand. It is
doubtful if they are often successful in securing con-
sumer insistence. They may, however, secure consumer
acceptance. By this is meant that the consumer will buy
the finished product more readily when he knows that
it contains certain parts which he feels are of high
quality. This causes the manufacturer of the finished
product to favor the use of advertised parts. To illus-
1 One large jobber has 8 warehouses in different parts of the country
and says that 85 per cent of his orders are filled within 24 hours. An-
other jobber has a warehouse with a capacity of 30,000 tons. He carries
bars of various shapes and sizes from which manufacturers forge their
products. He carries beams, girders, boiler tubes, sheets, cold finished
steels, electric drills, electric hammers, and grinding machines. He has
a fabricating department cutting bars and girders into the desired
lengths and punching and riveting them as desired by the buyers. He
has a force of salesmen to take orders over the telephone and another
force to call upon the buyers.
234 Marketing Industrial Goods
trate, the washing machine salesman tells the prospec-
tive purchaser that his machine is equipped with a
Westinghouse or General Electric motor and so builds
a feeling of confidence in the quality of his product.
The manufacturer of parts has a more or less un-
certain market. As the manufacturers of the finished
products grow, they tend to produce the various parts
entering into the make-up of their products. A manu-
facturer of parts may build a plant to produce goods for
a large customer and then be unexpectedly notified by
this customer that he has decided to make his own parts.
In order to maintain his business, the manufacturer of
parts should have many customers; he should, if pos-
sible, sell his goods for use in different industries; and he
should make several different products. He should con-
stantly try to improve his products and develop new
products from time to time.
Fabricated parts are commonly sold direct to the
manufacturer of the finished goods by salesmen, but they
may also be handled by wholesale supply houses.
Who controls the purchase of industrial goods? — The
purchase of the equipment for a plant is such an impor-
tant matter that it may be passed upon by the officers,
directors, or stockholders of a company. However, this
does not usually mean that they specify the exact goods
or brands to be bought. The actual choice may be made
by the company's engineer, plant manager, foreman,
purchasing agent, or president.
The purchase of a company's chief raw materials is
likely to be made by the purchasing agent or by some
other responsible executive who spends a large part of
his time studying the goods and trends of prices. A
tire company, for example, may have one purchasing;
agent who devotes his entire time to the purchase of
Marketing Industrial Goods 235
crude rubber. He thus becomes an expert on rubber
and may have the help of research departments which
devote much time to studying the qualities of rubber and
its price movements. In some companies the purchasing
agent is a real executive who has considerable authority
in determining what is to be bought. In other compa-
nies, he is merely a high-grade clerk placing orders for
goods requisitioned by the executives.
Finding the buyer. — The seller often has difficulty in
finding the man or men who actually make the purchase.
To illustrate, a company may have plants in Texas, an
engineering office in St. Louis, and a purchasing office
in New York. The order will actually be placed in New
York, but the goods may be specified by the plant man-
agers in Texas and approved by the engineers in St.
Louis. To illustrate the difficulty involved, a seller re-
ports losing a sale for which he had worked hard and
"sold" everyone in the buyer's organization from the
foreman up to the president. The order, however, was
placed by the board of directors, which gave the order
to a large and nationally known company on the basis
of its general reputation.
Type of salesmen needed. — There is a difference of
opinion as to whether trained salesmen or technical men
produce the best results in selling industrial goods.
Companies using trained salesmen say that selling in-
dustrial equipment is not fundamentally different from
selling other goods; that the same principles of psy-
chology and salesmanship apply; and that a good sales-
man can acquire the necessary knowledge of the
products. When necessary he can call upon the com-
pany's chemists, engineers, or metallurgists, to give
needed information to prospective customers. Those
companies using technical men feel that their products
236 Marketing Industrial Goods
are so complicated that technical knowledge is necessary
to explain them to the buyers, who are themselves often
technical men. When technicians are used, they are
usually given some training in the principles of sales-
manship.
For highly complicated products, such as machines
that are built to order, trained technical men seem to be
preferred. For simpler and less complicated products,
such as steel, expert salesmen appear to give better
results.
Chapter 13
Review Questions
1. What is meant by industrial goods? How do they dif-
fer from consumers' goods?
2. What are the different types of industrial goods?
3. What can you say of the demand for industrial goods?
4. What are the different types of equipment?
5. What determines the value of equipment?
6. Why is new equipment purchased?
7. How does the seller of equipment find buyers?
8. When can the equipment manufacturer advantageously
advertise in magazines read by the general public?
9. How is equipment sold?
10. What functions does the manufacturer's agent perform
in selling equipment?
11. What types of merchants sell equipment? What func-
tions do they perform?
12. What are operating supplies?
13. What factors have limited the demand for coal? Who
are the principal users?
14. How is coal marketed?
Marketing Industrial Goods 237
15. What determines the quality of coal? How can the
buyer select the proper coal for his needs?
16. What middlemen market coal? Which are merchants
and which are functional middlemen?
17. How does the marketing of raw materials differ from
the marketing of equipment?
18. Where is*steel produced? What are its chief uses?
19. How is steel marketed?
20. Describe the operations of steel jobbers. What serv-
ices do they perform?
21. What problems face the manufacturer of fabricated
parts? What can you say of the security of his market?
22. How are fabricated goods sold?
23. Who controls the purchase of industrial goods?
24. What is the position of the purchasing agent in buying
industrial goods?
25. What type of men should be employed to sell com-
plicated industrial equipment? To sell small and standard
appliances? To sell raw materials such as steel?
Thought Problems
1. What is meant by reciprocity in buying?
2. What industrial goods can you find advertised in peri-
odicals with general circulation?
3. How would you classify the following goods: plumber 's
tools; typewriter ribbons; sugar; tin plate; pig iron; lumber;
machine tools; crude rubber; automobile tires; tin ore; pig
iron; tin?
4. What is meant by obsolescence? What is its impor-
tance in marketing equipment?
5. Both the coal mining and the steel industries are said
to be overdeveloped. How does this overdevelopment affect
the prices of coal and steel?
238 Marketing Industrial Goods
6. What place should the purchasing agent of a manu-
facturing company occupy in the buying of coal? of lubri-
cating oil? of stationery? of equipment for a new plant?
of motor trucks? of bookkeeping machines? of automobiles
for the company's salesmen?
CHAPTER 14
Selling Service
Meaning of service. — We spend our money not only for
goods but also for services. In the past most of the at-
tention of those interested in distribution has been de-
voted to the marketing of goods; services, however, are
also very important to the consumer. If we include
savings, taxes, and shelter, then services take between 40
and 50 per cent of our income. We may think of services
as those things which we buy that are not tangible goods.
There are many such things. When we buy insurance,
we receive only a policy; when we buy a ticket to the
theater, we obtain only the right to see and hear the
performance; when we visit the barber shop, we carry
away no goods; and when we pay the laundry bill, we
receive no new clothes. In all such cases we are buying
intangible things and not actual goods.
Kinds of services. — There are many kinds of services.
First, we find various types of personal service. In this
group come entertainment, such as talking pictures,
music, and athletic contests; medical advice; laundry
and pressing service; protection furnished by detective
agencies, guards, and lawyers; credit information; work
in making repairs, as on automobiles, watches, and shoes ;
and so forth.
Second, there is transportation, the moving of goods
and persons front one place to another.
The third type of service includes the group which we
commonly refer to as "utilities" or "public service" com-
239
240 Selling Service
panies which sell electricity and telephone and telegraph
communication. Water and gas are generally included
in this group, although they arc definite commodities.
Fourth, there is savings. When we save we receive a
deposit slip from the bank, an insurance policy, a mort-
gage, a bond, or shares of stock. When we save we post-
pone the satisfaction of consuming goods or services to a
later time.
The fifth type of service includes the rental of lodgings
and shelter, such as hotel rooms, apartments, and houses.
We receive the right to use definite physical goods, but
we do not receive ownership of the buildings.
And last, we have services provided by the government,
such as schools, police and fire protection, and streets and
roads, for which we pay taxes.
Importance of service. — It has been estimated that the
American people spent in the neighborhood of ten billion
dollars annually for rent in the years from 1927 to 1931.
Savings vary with the prosperity of the country but in
several years have been over ten billion dollars. Per-
sonal, professional, and public utility services and amuse-
ments cost another ten billion. The total cost of
transportation is even larger, but most of it is involved in
moving goods and is paid for by the consumers in the
purchase of the finished goods. In the depression year
of 1933, the sales of hotels, personal service establish-
ments, and amusements amounted to 2,761 million
dollars.
Figures showing the number of establishments, sales,
and employees for selected service industries, as reported
by the Census for 1933, are given in Table 24. It should
be remembered that 1933 was a poor business year. It is
also possible that the Census enumerators missed some
establishments.
Selling Service
241
TABLE 24.— BUSINESS OF SELECTED SERVICE INDUSTRIES
IN 1933
(Census Data)
Number of Sales Average N urn-
Estabhsh- (millions) ber Full-Time
ments Employees*
Total services (only a part listed
below) 443,217 $1,725 356,190
Barbershops 117,832 204 71,347
Beauty parlors 42,073 117 42,733
Cleaning & pressing . 55,459 136 28,274
Funeral directors.. . 12,655 172 16,414
Hand laundries t . 13,691 37 7,811
Photographic studios 8,330 32 5,881
Shoe repair shops . 50,425 87 12,876
Shoe shine parlors . 7,027 10 2,826
Credit adjustment & collec-
tion bureaus .. 1,824 35 11,936
Advertising' agencies . 1,479 190 11,642
Trucking . 23,102 175 39,291
Plumbing and heating repairs 6,608 27 3,447
Radio repair . . 4,501 6 650
Watch & jewelry repair 9,678 15 1,302
Amusements (only a part listed
below) ' . 29,737 520 87,372
Pool parlors & bowling alleys 11,438 32 9,016
Dance halls 2,933 10 2,884
Motion picture theaters 9,499 356 54,030
Theaters, legitimate stage, &
opera 122 9 1,182
Motion picture & vaudeville
theaters 644 50 7,924
Hotels 29,462 516 213,919
Year 'round 27,128 493 205,570
Seasonal** 2,334 22 8,349
TOTAL SERVICES, AMUSE-
MENTS, & HOTELS 502,416 $2,761 657,481
*Does not include proprietors, partners, members of their families, and part-
time employees Total number of proprietors, 546,444.
fPower laundries included as factories in Census of Manufactures.
** Figures probably incomplete as many hotels were closed when Census was
taken.
Selling services and selling goods.— The demand for
services arises from the same human desires as the de-
mand for goods. The methods of selling goods and serv-
ices, however, differ in some respects. Services are often
242 Selling Service
sold direct by the producer to the consumer, and middle-
men are of relatively less importance than in the sale of
goods. The middlemen used may be either merchants
who buy and sell in their own right or agents who are
paid by the seller. Tickets (theater, steamship, baseball)
are often sold though agents and sometimes by dealers
(e.g., speculators) ; mortgages, stocks, and bonds are often
sold through banks and investment houses; and insurance
policies are distributed through agencies.
It requires a higher type of salesmanship to sell in-
tangible services which the buyers cannot see than to sell
tangible goods. The salesman must appeal to the imagi-
nation. The insurance salesman cannot show his wares,
for the buyer receives only a policy which gives him the
right to receive something at a later time, or protection
against a contingency which may not happen. The bond
salesman must persuade his customers to limit present
spending for the advantages of future spending.
The salesman for education, entertainment, travel, or
advice must induce the customer to purchase before he
knows the quality of service which he receives. The
quality of past purchases may, however, be an important
factor with some buyers. In the sale of lodgings, on the
other hand, the salesman has very definite goods to show
the buyers, who can see the house, the rooms in the
apartment, or the furnishings in the hotel.
Advertising. — Advertising is used in the sale of serv-
ices and is often of greater importance than personal
salesmanship. Many services are sold in such small units
that the size of the sale does not justify sending out
salesmen to hunt for individual customers. It would, for
example, be rather expensive to employ outside salesmen
to sell tickets to picture shows. Salesmen, however, are
Selling Service 243
often used when the individual sales are of large value,
as is true of travel tours, bonds, or insurance.
The great majority of people are prospective buyers
for many kinds of services. Such services can be adver-
tised in the newspapers, on billboards, in magazines, by
radio, and by the use of direct-mail material, such as
letters and pamphlets.
Publicity. — Publicity has been distinguished from
advertising by the fact that it is not paid for directly.
It may be printed or oral and is frequently used in the
sale of various kinds of service. This is particularly true
of sports and amusements, which are given much pub-
licity by the newspapers. Publicity is often used to sell
such ideas as thrift and health — for example, dental and
medical examinations — to the public.
Selling entertainment. — There are many forms of com-
mercial entertainment — theaters, ball games, prize fights,
musical concerts, circuses, clubs, tours, dance halls, and
the like. The relatively small size of the individual sale
(ticket) of most of these amusements limits the use of
personal salesmen. The sellers often advertise on bill-
boards, in local newspapers, on theater programs, in hotel
lobbies, and direct by mail. Some films are advertised
in magazines with national circulation. Publicity is a
potent factor in creating demand for many of these ex-
hibitions. The attendance at ball games or prize fights
may be largely determined by the publicity on the sports
pages of the papers, and the attendance at theaters or
musical performances is influenced by the press reviews
and notices. People flock to see those pictures which
their friends tell them are good and avoid those which
are said to be poor. Sellers want to get people to talk
favorably about their performances.
244 Selling Service
The enjoyment of entertainment depends upon other
things than the intrinsic quality of the performances —
such, for example, as the weather, the surroundings, and
the kind of people in the audience. The theaters have
been among the leaders in cooling their buildings in hot
weather. Beautiful surroundings likewise help. People
want change — variety is the spice of life. Entertainers
are constantly on the lookout for new forms of amuse-
ment or for new settings for old forms. Few factors at-
tract customers like crowded houses — the knowledge that
all the seats have been sold.
Selling professional services. — Some professions limit
their members in soliciting business. In such cases, the
theory seems to be that if the professional man does
good work, his clients will tell others and his practice
will grow. This is the basis of the ethics of the legal
and medical professions, which prohibit personal sales-
manship and large advertisements. Other groups have
an entirely different viewpoint. Credit bureaus, for ex-
ample, employ both salesmen and advertising. Advertis-
ing agencies believe in advertising and hence advertise
and employ salesmen to secure clients. Accountants
frown upon the use of advertising but allow a certain
amount of personal salesmanship. Statistical organiza-
tions employ salesmen and advertise.
Regardless of whether or not the seller of this type of
service advertises, a considerable portion of his success
will depend upon how his clients speak of his services.
Reputations may be established in this way, and reputa-
tion counts greatly in attracting customers.
Other personal services. — Repair shops, detective
agencies, laundries, barber shops, beauty parlors, and the
like, very often advertise, and some organizations employ
Selling Service 245
salesmen. They may use advertising novelties, tele-
phone directories, billboards, electric signs, and direct-
mail advertising, as well as advertisements in periodicals.
Selling transportation. — To meet competition the rail-
roads have improved their service, speeded up their
trains, advertised to the public, tried to make their em-
ployees courteous and helpful to travelers and shippers,
and in some cases reduced rates.
To secure freight traffic, the roads often provide special
terminal facilities, such as warehouses for storing and
reshipping merchandise, team tracks, unloading plat-
forms, heated warehouses and auction rooms, stores
equipped with refrigerators for butter and egg dealers,
and elevators for handling grain. Many roads pick up
and deliver less-than-carloads free. This service is called
"store-door delivery/' They advertise the frequency of
service and the promptness of trains. The roads employ
personal salesmen to solicit business from large shippers.
The service furnished by the roads in promptly supplying
empty cars for loading, in picking up loaded cars, in
spotting cars for unloading, and in settling claims for loss
and damage, and the speed and regularity in delivering
goods at destination, are of fundamental importance in
securing business.
Some railroads have organized personally conducted
travel tours. Some serve tea to passengers on their trains.
Some have provided reserved seats in day coaches. Some
sell combined rail-and-air, and rail-and-bus, tickets.
Many have personal salesmen to solicit passenger busi-
ness, especially sight-seeing and convention parties. The
railroads advertise the speed and luxury of their pas-
senger trains, the scenery along their routes, the cleanli-
ness and safety of their trains, and the excellence of the
246 Selling Service
meals in their dining cars. Direct-mail advertising tell-
ing about the railroad service is sent to members of
organizations that are holding conventions.
Buses, trucks, and airplanes may use similar methods
to obtain customers. Speed or quickness of delivery,
frequency of service, cleanliness, low cost, and safety
may be advertised in magazines, on billboards, in news-
papers, and direct by mail. Publicity and personal sales-
manship also may be used. Satisfied customers tell
others and increase traffic.
Selling electricity. — Central station companies pro-
mote the sale of electricity in many ways. To sell elec-
tricity to the general public, it is, of course, necessary
that houses be wired. The number of wired homes is
therefore increased by advertising electric service, by low
prices or liberal credit on the cost of wiring, by reduced
price for electricity, and by extending electric lines. In
recent years the number of wired houses has been notably
increased by the building of rural lines which supply the
farmers with electricity for operating machinery and
household appliances and for lighting farm buildings.
After a house is wired, the company may increase the
sale of current by inducing the consumers to buy more
electric appliances. Many electric companies promote
the sale of such electrical appliances as irons, washing
machines, percolators, fans, mangles, radios, refrigerators,
toasters, waffle irons, and stoves. They realize that the
more appliances there are in use, the more current will
be used. Some companies themselves sell such appliances
through their own retail stores or by house-to-house
salesmen. They often advertise such appliances in the
newspapers and by material enclosed with the monthly
bills. Some of them give liberal credit terms.
In order to increase the consumption of electricity by
Selling Service 247
merchants, the electric companies may have salesmen and
lighting experts call upon them and show them how they
can increase their sales by properly lighted show win-
dows, display cases, store interiors, and outside electric
signs.
Central station^ companies may increase the sale of
electricity to factories and other industries by reducing
rates and by convincing such users that they can secure
more dependable and cheaper power than by generating
it themselves. Large central stations can usually pro-
duce power more cheaply than small plants, because of
the greater efficiency of their equipment. Large users
may be able to buy power more cheaply than they can
generate it, because they have to pay only for the power
used and do not have to maintain large power plants
which are idle much of the time. The central station
company can use its equipment more regularly, as the
peak loads of its customers do not all come at the same
time. This reduces the overhead cost of each unit of
current. Concerns that buy their power do not have
capital invested in power plants, and they do not need
space for such plants. In expensive city locations, the
saving in space is an important factor. The central
station company uses salesmen and direct-mail and busi-
ness paper advertising to reach industrial buyers.
Selling gas. — Gas was originally used for lighting, but
with the introduction of electricity, most of this market
was lost. Gas was next sold for cooking, baking, and
the operating of industrial furnaces. Electricity is now
cutting into these markets. In order to maintain and in-
crease their sales, the gas companies are selling gas for
other uses — domestic water heaters, heating homes, and
operating refrigerators. In order tc hold the market for
cooking and industrial furnaces, better types of stoves
248 Selling Service
and furnaces are being developed and manufacturers are
shown the advantages of gas as a fuel.
Selling telephone and telegraph service. — The number
of telephones has been increased by advertising the sav-
ing in time made possible by their use. Business men
are urged to use the telephone for selling, especially for
out-of-town calls. Long-distance service is sold by show-
ing the saving in time and by reducing rates for night
and Sunday calls. People are urged to put more tele-
phones in their homes and offices, the convenience of
extensions being emphasized.
The telegraph companies urge people to use telegrams
to save time, to secure attention, and to get action.
Many people consider telegrams as urgent and give them
prompt attention. The advantage of telegrams for mak-
ing sales and collections is obvious. Lower night rates
induce people to send longer messages. Standard tele-
grams are provided covering many common situations;
these messages save the time of the senders in writing
messages and are often delivered at reduced rates.
Selling thrift. — Life insurance companies, savings
banks, bond houses, and building and loan associations
try to induce people to save. Life insurance sales have
increased since insurance has been advocated as a method
of saving rather than as a protection against death.
People are told to save so that they can live in comfort
when they reach the retirement age; so that their de-
pendents can have an income sufficient to maintain their
standard of living in case of the death of the breadwin-
ner; in order to accumulate capital with which to enter
business; as protection against the proverbial rainy day;
and to attain a higher standard of living.
Personal salesmanship is apparently more important in
the sale of life insurance and bonds than is advertising,
Selling Service 249
although various forms of advertising are used. Life in-
surance companies and bond houses have found that the
proper selection and training of salesmen greatly increase
sales.
The investment of money is based on the confidence of
the investor in the security purchased. The ordinary
consumer is incompetent or too busy to properly judge
the quality of investments, and he therefore prefers to
buy from a seller in whom he has confidence. The seller
often acts as an advisor, and his success over a long period
will depend largely upon the quality of the advice given.
In order to secure confidence, most advertising of in-
vestments is conservative. Salesmen should dress con-
servatively and avoid extreme or exaggerated statements;
they should have the knowledge, culture, and confidence
that enables them to meet educated, intelligent, and suc-
cessful people and to secure their respect and confidence.
Selling lodgings. — There are several types of hotels —
commercial, apartment, resort, and family (residential).
The sales problems of these various types differ slightly,
but reputation, location, and appearances are important
to all. People go to those hotels which they hear are
good and stay away from those which they hear are
poor. The hotel, naturally, wants to secure a good repu-
tation.
Many commercial and resort hotels owe their existence
to their location in business centers, near transportation
facilities, near depots, in particular climates, or near
natural beauty spots. Location is also important to
apartment and residential hotels, which should have at-
tractive locations with good transportation facilities con-
necting them with the business districts. Garage
facilities are important to all classes of hotels.
The hotel can use inside and outside selling. Inside
250 Selling Service
selling is done by the employees and by printed notices
in rooms, elevators, and dining rooms. Courtesy, friend-
liness, and prompt attention to wants by greeters, clerks,
porters, waiters, and managers do much to create good-
will. Notices in the rooms, in the elevators, and on the
menu cards can be used to call attention to dining rooms,
laundry and valet service, beauty parlors, libraries, and
other facilities offered by the hotel.
Outside selling may be done by advertisements along
highways, in newspapers, in hotel directories, in trade
papers, on theater programs, and on advertising novelties.
Direct-mail advertising may also be used. Mailing lists
may include professional men, business men, salesmen,
members or organizations holding their conventions in the
city, and former guests. Resort hotels may send adver-
tisements to former guests, to people who are about to
be married, to school teachers and other professional
people, to business men, and to society leaders.
Advertisements may feature food, bedside telephones,
garage or parking facilities, comfortable beds, attractive
rooms, convenience of location, valet service, libraries,
nurseries for children, separate floors for women, or low
prices. The resort hotel may advertise the beauty of its
location; its private beach, golf links, or swimming pool;
or the comfortable weather.
Personal salesmanship may be used to secure conven-
tions or parties of tourists. Some large hotels have spe-
cial departments to secure conventions.
Apartment hotels may call attention to the fact that
their guests are relieved of worry over the servant prob-
lem; to their dining rooms, garages, soundproof walls,
hand laundries, or beauty parlors ; to the even tempera-
ture of their rooms; to the type of guests; to the con-
venience of transportation facilities or business and
Selling Service 251
education centers; to the quietness of their location; and
to the beauty of their buildings.
The apartment house may call attention to the con-
venience of its kitchens, its iceless refrigerators, its gar-
bage incinerators, its soundproof walls, its garage
facilities, its restaurant, its laundry service, and the fact
that its tenants are freed from the worry of furnaces and
cleaning sidewalks.
Chapter 14
Review Questions
1. What is meant by service?
2. What are the different kinds of services?
3. How important are the various services to the con-
sumer?
4. How does the selling of service differ from the selling
of goods?
5. How does the sale of lodgings differ from the sale of
bonds?
6. How is advertising used in selling service?
7. What is meant by publicity? How is it used in selling
service?
8. Why do doctors not advertise?
9. How is entertainment sold?
10. How is professional service sold?
11. What is the difference in the way an advertising agency
sells its service and the way a lawyer sells his service?
12. How do the railroads sell their services?
13. How does the sale of passenger service differ from
the sale of freight service?
14. How do central station companies promote the sale
of electricity to domestic users? To stores? To factories?
252 Selling Service
15. How do gas companies promote the sale of gas?
16. How is telephone and telegraph service sold?
17. How is thrift sold?
18. How may a commercial hotel advertise its services?
19. How may a resort hotel advertise its services?
20. How may an apartment hotel advertise its services?
Thought Problems
1. Why do the newspapers give so much free publicity
to baseball and other sports? Professional sports are operated
for profit. Is there any more reason why newspapers should
give free publicity to them than to the department stores,
hotels, and railroads?
2. Name services which you have heard advertised over
the radio; which you have seen advertised in magazines;
and which you have seen advertised in the newspapers.
3. Do doctors and lawyers attempt to secure publicity
without paying for it?
4. Criticize the selling methods used by the railroads.
5. The Sunbeam Hotel is located between an important
automobile highway and a beautiful lake in a resort country.
In the past it has catered very largely to a transient trade.
It is an AAA (American Automobile Association) hotel. It
has a small private beach on the lake, golf links, and tennis
courts, and boats for fishing are available in the community,
The highway is relocated so that it runs some four miles
to the west of the Sunbeam Hotel. The owner of this hotel
is faced with the problem of changing to a resort business
and securing tourist trade. Outline a selling plan.
CHAPTER 15
Marketing Farm Products
The nature of farming. — Farming is a small-scale
industry. There are more than six million farms in the
United States. We have heard much of large-scale farm-
ing by corporations, but the number of such large farms
is relatively small. The typical farm is operated by the
owner or a tenant, with the assistance of his family and
often a hired man.
There are several types of farming. There is mixed
(diversified) farming, especially in the East. Under this
system the farmer may raise fruits and vegetables; grain;
cattle, hogs, poultry, or other livestock; and milk or
cream. There is middle western grain farming, in which
the principal products sold are wheat, hogs, cattle, corn,
and oats. There is the plantation of the Cotton Belt,
operated with the assistance of several colored tenants.
There is the ranch of the central and mountain states,
raising cattle or sheep on a large scale. There are the
fruit and truck farms of California, New York, New
Jersey, Texas, Florida, and other states; in this type of
farming, a few acres keep the owner busy. There are
the dairy farms, especially near our large cities and in
Wisconsin, Minnesota, Vermont, and New York, where
the cows require systematic attention and produce a
regular cash income throughout the year. There are also
many small farms near cities and towns, operated by
253
254 Marketing Farm Products
people employed in the cities; such farms have increased
rapidly in number with the use of the automobile.
With so many types ot farms, averages mean little.
They do, however / establish the fact that farming is a
small-scale industry. The average farm consists of 145
acres, of which an average of 56 acres is in cultivation
and 64 acres in pasture.'
One-crop versus mixed farming. — Some farmers are
interested in producing only one product for the market
— for instance, cotton, milk, corn, hogs, wheat, cattle,
oranges, or tobacco. This is known as one-crop farming.
If the season is good and the price is high, the one-crop
farmer may be prosperous. It, on the other hand, the
season is poor or the price is low, he may be very poor.
Some farmers produce many products for the market,
not wishing to "carry all their eggs in one basket." This
is known as mixed farming. If one crop fails, another
may be good ; if the price ot one crop is low, the price of
another may be high. The man engaged in mixed, or
diversified, farming ma> work more days per year than
the one-crop farmer, but over a period of years he seems
to be more prosperous.
Farm income. — We have often considered the years
1923 to 1929 as normal good years in our economic life
The years 1930 to 1933 were poor years, and especially
so for farmers. In Table 25 figures for farm income are
presented for 1929, which may be taken as a more or less
normal year, and for 1933, a very poor year.
The farmers' net income declined 54 per cent between
1929 and 1933. The largest relative declines in income
came in grain and in cattle, hogs, and sheep. The small-
1 The remainder is in woodland or other unimproved land, or is
fallow.
Marketing Farm Products 255
TABLE 25.— FARM INCOME FOR 1929 AND 1933
(Figures in Millions)
1929 19SS
Income from crops:
Grains $1,297 $ 506
Fruits and nuts 707 376
Vegetables 1,130 747
Sugar crops (cane and beets) 83 81
Cotton (including seed) 1,389 684
Tobacco 286 179
Other crops 542 301
Total crops $5,434 $2,874
Income from livestock:
Cattle, hogs, and sheep $2,805 $1,186
Dairy products 2,323 1,263
Poultry and eggs 1,241 560
Wool 99 75
Other 39 27
Total livestock $6,507 $3,111
Total income from crops & livestock $11,941 $5,985
Rental & benefit payments by government . . ^^^^ 271
Gross income $11,941 $6,256
Expenditures:
Operating expenses (e.g., equipment, feed,
fertilizer, ginning cotton, etc.) 1,972 1,088
Depreciation of equipment and buildings. . 912 762
Wages, interest, rent, and taxes 3,402 1,779
Total expenses $6,286 $3,629
NET INCOME $5,655 $2,627
est relative declines came in sugar, wool, vegetables, and
tobacco.
The average gross income per farm was approximately
$1,900 in 1929, and $995 in 1933. The average net in-
come per farm was $900 in 1929, and $420 in 1933.
Concentration and dispersion. — Farm products are
produced on millions of farms scattered over wide areas,
and are often manufactured into food, clothing, or other
products before reaching the final consumers. The prod-
256 Marketing Farm Products
ucts of the factories which manufacture these goods,
and the farm products which are ready for consumption
without manufacture, must be dispersed to supply the
needs of more than a hundred million consumers.
Farm products as raw materials. — It has been esti-
mated that approximately three-fourths of the farm
products must be manufactured before they are con-
sumed. Cotton must be spun into thread and woven into
cloth; cattle, hogs, and sheep must be made into meat;
and wheat must be made into flour, and often into bread,
before reaching the consumer. Wool, flax, corn, tobacco,
sugar cane, sugar beets, rubber, and broom corn are other
products that must be manufactured before reaching the
consumer.
On the other hand, some farm products, including fresh
fruits and vegetables, milk, farm butter, farm cured
meats, honey, and nuts, are ready for consumption when
they leave the farm.
Farm products as consumption goods. — Most farm
products eventually become consumption goods — food,
clothing, house furnishings, automobile tires, and the like.
A relatively small portion of the farm products are finally
consumed as industrial goods.
Marketing methods. — There are three common mar-
keting methods by which farm products reach the mar-
ket: first, sale for local consumption; second, shipment
by truck to nearby markets; and third, shipment by rail,
trutfk, or water to distant markets. Sale for local con-
sumption is important in the sale of fruits, vegetables,
milk, eggs, and poultry. Shipments by truck have grown
very rapidly during the past decade, but the greatest
quantity of goods are still moved by rail.
Farm products sold for local consumption. — Many
farmers sell their products for local consumption. In
Marketing Farm Products 257
this case assembling is relatively unimportant. The
farmer may sell direct to the consumer by peddling from
door to door, by selling in farmers' retail markets, by
shipping by parcel post, or by establishing roadside mar-
kets and selling to consumers who pass in their auto-
Courtesy U. S. Dcpt. Agriculture.
Fig. 20.— A farmers' market in a large city. In some markets
the farmers sell fruits and vegetables to both dealers and consumers.
In other cities there are separate wholesale and retail markets. When
the farmers sell direct to the consumers, no middlemen are involved.
mobiles. To save the time necessary in selling to the
consumers, the farmer often sells to local retailers; this
practice is common in many towns for such products as
milk, eggs, chickens, butter, vegetables, and fruits. In
some cases the farmers sell to local jobbers who sell to
the retailers.
Shipment by truck. — The motor truck has attained
great importance in moving fruits, vegetables, poultry,
eggs, cotton, tobacco, milk, and livestock. Butter and
258 Marketing Farm Products
grain are also moved by truck. Farm products arfe
moved regularly for distances up to 200 miles, and longer
distances are not unusual. Some districts ship most of
their livestock, fruits, and vegetables by trucks. The
truck often moves goods directly from producing sections
to consuming areas and thus eliminates the necessity for
goods passing through central distributing markets. The
truckman sometimes acts as a merchant, buying the
goods from farmers or from local buyers, hauling them to
a city, and selling them in an attempt to make a profit.
More often the truckman acts as a carrier and is paid
by either the farmer or the buyer. City wholesalers
often send their trucks into the country to buy goods
from farmers and local buyers. In the city the truck-
man may sell his goods to wholesalers or to retailers, or,
if he does not own the goods, he may deliver them to
commission merchants to be sold for the account of the
shippers. The truckman may occasionally sell to the
consumers, but this method is usually too slow to be
profitable, except for those using light trucks.
Rail shipment. — A very large proportion of farm prod-
ucts are shipped by rail, local buyers usually buying,
assembling, and loading the goods into the cars. At
times, goods pass through the hands of two middlemen
in the country — the local buyer and the carlot shipper.
The shippers consign the goods to commission merchants,
have them sold by brokers, or sell to wholesale buyers.
City wholesalers often send representatives out to con-
tact country shippers and make purchases or arrange-
ments for regular shipments. Sometimes connections are
made by telegraph or mail. Sometimes the city whole-
salers buy direct from the farmers. In the central mar-
kets the receivers of farm products sell them to
wholesalers, jobbers, manufacturers, exporters, or in-
Marketing Farm Products 259
tegrated retailers; or they sell to brokers who purchase
for such buyers.
The supply of farm products. — The production of
many farm products varies widely from year to year
because of differences in the weather and in the acreage
planted. The weather is perhaps the biggest single fac-
tor in determining the supply of a given crop produced
in a given year. A prolonged drouth may reduce the
yield, and an untimely frost may ruin a crop ; yet a good
growing season with plenty of rain may mean a bumper
crop. Other important factors that affect the supply
are the number of acres planted and the number of
livestock bred.
During a ten-year period, the wheat crop varied from
676 to 968 million bushels; the cotton crop varied from
8 to 18 million bales; and the potato crop varied from
323 to 453 million bushels. During the same period, the
number of hogs on farms varied from 54 to 71 million,
and the number of beef cattle, from 26 to 36 million.
The demand for farm products. — The demand for
farm products is relatively steady. Farm products are
used chiefly as food and clothing, the demand for which
varies relatively little from year to year.2
Prices of farm products. — The supply of farm prod-
ucts varies widely, while the demand for them is
relatively steady. The variation in supply causes great
changes in prices, but the demand does not usually
change very greatly with the fluctuation in prices. In
2 We need about the same amount of food every day. When prices
are high or our incomes are low, we do economize to some extent by
eating cheaper foods. A family that has been eating beef may sub-
stitute pork, while a family that has been eating pork may eat more
bread. There is more of this shifting in Europe than in the United
States, owing to lower incomes in Europe. Changes in European
demand at times have influenced the prices of American farm products
more than the changes in the United States.
260 Marketing Farm Products
order to stabilize prices, it would be necessary to control
the supply.
Control of supply. — The farmers do not always reduce
the supply of farm products when prices drop; in fact,
.when prices drop, some of them increase their acreage
in an attempt to maintain their incomes. On the other
hand, farmers usually increase production when prices
rise. The cultivated acreage in the United States in-
creased with high prices from 311 million acres in 1909
to 376 million in 1919. Prices broke sharply in 1920.
In spite of the lower prices, the acreage fell to only 357
million in 1926, and remained near that figure for several
years. This was a decrease of 19 million acres. Trucks,
tractors, and automobiles were substituted in large
numbers for horses. Such machines do not consume
farm products as 'do horses. It is estimated that these
changes eliminated the demand for the products of about
thirty million acres. Scientific farming also increased
the yield per acre in some instances.
Several reasons for the failure of farmers to reduce
production may be mentioned. Many of the farmer's
expenses are fixed — for example, taxes; interest on mort-
gages; and depreciation of buildings, fences, and equip-
ment. Such expenses go on whether production is
curtailed or not. The farmer's cash income is generally
higher than the expenses which he could avoid by re-
ducing production; therefore he has little incentive to
decrease acreage. Finally, if the farmer tries to solve
the problem by leaving the farm, his investment may
be lost unless he is able to sell it. Farming is a method
of making a living, and even if the farmer does not re-
ceive much cash, he has his food and a house to live in.
He is hopeful that the next season will bring higher
prices, a larger crop, or both-
Marketing Farm Products 261
Shifting production. — It has been suggested that when
the price of one crop is low, the farmer should shift pro-
duction to more profitable crops. According to this view,
a farmer should not stick to one crop, nor should he
adhere rigidly to a definite rotation of crops on all of
his land.
At present some such shifting is done. The acreage
of potatoes, cabbage, cotton, and flax does vary consid-
erably from one year to another. In most cases, how-
ever, acreage is changed in response to the price at or
before the planting season and not according to expected
future prices. Thus, if the price of cotton is high during
January and February, the acreage is increased — often so
greatly increased that the price of the next crop is low.
Such changes defeat themselves. To make his operations
profitable, the farmer should shift his production in ac-
cordance with probable future prices.
Forecasting prices. — In order to shift production
wisely, the farmer should forecast prices, which means
that he must predict supply, since demand is fairly
constant. Future supply depends upon the amount car-
ried over from previous years, the weather, and the acre-
age. Can the weather and the acreage that will be
planted be foretold? According to some, the weather
runs in predictable cycles; as yet, however, weather cy-
cles are too little understood to be of a great deal of use
to the average farmer. The government issues reports,
or estimates, of intended plantings (acreages) for certain
crops. These reports may be useful to those planting
late in the season, who can decrease or increase their
acreages accordingly.
It has been observed that the production of some prod-
ucts runs in more or less well-defined cycles. There is
said to be a 2-year cycle in cabbage and cotton, a 4- to
262 Marketing Farm Products
6-year cycle in hogs, and a 6- to 10-year cycle in beef
cattle. To the extent that such cycles hold true to past
performance, the individual farmer can forecast future
supply with some assurance.
Production cycles. — Production cycles appear to be
caused by variations in supply and price. One year there
is a large cabbage crop; the price drops to an unprofitable
level, and the farmers plant fewer cabbages the next
year. This smaller acreage reduces the yield and raises
the price, so that the next year the farmers increase the
acreage of cabbage.
When hogs are plentiful, the price drops. It is more
profitable for the farmers to sell their corn than to feed
it to hogs. They therefore raise fewer pigs. Within a
year and a half or two years, there are fewer hogs on the
market, and prices rise; this higher price causes farmers
to increase the number of pigs raised. The farmer who
studies the price trends and the supply factors and acts
accordingly has many hogs to sell when prices are high
and few hogs to sell when prices are low. The farmer
who bases his operations on present prices has most hogs
to sell when prices are low and fewest hogs to sell when
prices are high. A middle course is followed by some
farmers who raise about the same number of hogs each
year regardless of the price.
The idea of forecasting prices can be illustrated by an
old story of a farmer who got rich by planting the crops
with low prices. If the prices of potatoes and cabbages
were low, he would increase his acreage of these crops
and pass by or reduce his acreages of the crops with high
prices. This man based his actions on the belief that
other farmers would do the opposite. This is a good
policy as long as the majority of farmers act as expected;
but as soon as the mass of the farmers come to follow the
Marketing Farm Products 263
policy of this man, a different method of forecasting
prices will be necessary.
The cooperative marketing of farm products. — In
order to raise the prices received for products and lower
the prices of supplies bought, the farmers have organized
cooperative marketing associations. These associations
are based upon joint action on the part of their members
for the purpose of selling their products or of buying
supplies.
There are nearly 11,000 of these organizations with
over three million members.3 Their annual business in
1933-34 was estimated at 1,365 million dollars. Nearly
one-fifth of all the products sold by the farmers pass
through the hands of cooperative associations, and more
than four-fifths of the total business of the cooperatives
consists of the sale of dairy products, grain, fruits and
vegetables, livestock, and cotton.
The basic principles of a cooperative organization are
democratic control, a limitation of interest paid on cap-
ital to a fair rate, and the distribution of profits to the
members on the basis of the volume of business furnished
by each. This latter principle is known as patronage
dividends. If an organization handles 10,000 bushels of
a product and makes a profit of $1,000, it could pay a
patronage dividend of ten cents a bushel. If John Smith
delivers 1,000 bushels to the association, while Henry
Brown delivers 500 bushels, John Smith would receive
a patronage dividend of $100, while Henry Brown would
receive $50.
Types of cooperatives. — Of the several types of coop-
erative associations, the two most important types, for
3 As one farmer may belong to more than one association, these three
million members represent a considerably smaller number of farmers
264 Marketing Farm Products
our purposes, are small, local associations and large,
national or regional associations. The small, local as-
sociation ordinarily operates at one country shipping
point or at a few nearby shipping points. The large
association covers a large territory. It may handle goods
at many shipping points and have its own organization
to handle goods in the central markets. The large or-
ganization may be a federation of a number of small as-
sociations, or it may be a centralized organization setting
up whatever shipping facilities it thinks necessary at
local points.
Objects of cooperatives. — The objects of farmers'
cooperatives are to reduce marketing costs; to increase
demand; and to stabilize prices, in order to increase the
prices received by the farmers.
Reducing marketing cost. — The cooperative associa-
tion attempts to reduce marketing costs by increased
efficiency, by eliminating the profits of the private mid-
dlemen, and by reducing the duplication in marketing
machinery. When efficiently managed, cooperatives
often return worthwhile benefits to their members. If
not efficiently managed, they are often able to pay no
higher prices than competing private middlemen and
are often forced out of business. Two cooperatives sel-
dom compete at the same shipping point, which often
means that the cooperative (elevator or creamery, for
example) secures a larger volume of business than do the
competing private shippers. The large volume may
therefore enable it to operate at a lower unit cost. Un-
less it is less efficiently operated, it can secure for its
members the profits of the private middlemen.
The local association assembles the farmers' products,
ships them to central markets, and often grades and
packs the products handled. The association in the
Marketing Farm Products 265
sentral market receives goods from the country and sells
them for the local associations.
Pooling. — The cooperative association often pools the
Farmers' products, by which is meant that all goods of the
game quality received during a given period are handled
as one lot. The same price is paid for all goods in a pool,
although they may be sold at different times and prices.
The farmer receives the average price realized on the
sale of all the goods in the pool, less operating expenses.
Thus the individual farmer does not suffer as the result
3f poor luck in selling his own goods in a poor market or
3n a poor day; neither does he benefit from good luck
in selling them in a good market or on a good day.
Increasing demand. — Many cooperative associations
try to increase demand by advertising, by improving the
quality of their products, and by having all markets sup-
plied regularly.
Stabilizing prices. — Prices may be stabilized by keep-
ing all markets regularly supplied. This is called feed-
ing the market. Goods need to be distributed both at
the right place and at the right time. The association
tries to distribute goods so that all markets are evenly
supplied. Goods should be so distributed that both gluts
(over-supplies) and famines are avoided.
Monopoly prices. — The farmers may secure higher
prices as a result of efficiently managed cooperative or-
ganizations; but it must be remembered that if prices
are raised to profitable levels, the majority of farmers
will increase their production (unless prevented from
doing so in some artificial way). This increased supply
will lower prices.
The farmers have at times tried to secure monopoly
prices. In order to secure monopoly prices, it is neces-
sary to control the supply. The farmers have attempted
266
Marketing Farm Products
to control the supply through cooperative associations,
but so far they have been unable to control supply ex-
cept for short periods. When the price is raised, pro-
duction increases. It appears that the farmers are unable
to control supply permanently through cooperative as-
sociations and hence are unable to secure permanent
monopoly prices.
160
140
120
100
80
60
40
20
1 1
1 1 1 1
Far/net
-sIMativcto
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1910 1912 1914 1916 1918 1930 1932 1924 1926 1928 1930 1932 1934 1936
Fig. 21. — Prices of farm products and of products purchased
by farmers. (1923-25 = 100)
Prices paid and received. — The farmer's welfare
depends almost as much upon the prices which he has
to pay for the things he buys as upon the prices of the
things he sells. Much has been heard about the suf-
fering of the farmers resulting from the low prices of
farm products. It would be just as accurate to say that
they suffered from the high prices of the things they
bought. If we take the years 1923 to 1925 as a base
period — a period when average conditions prevailed —
we find that the farmers were relatively well off from
1900 to 1920, and relatively badly off in 1921, 1922, and
from 1930 to 1933. See Figures 21 and 22.
Marketing Farm Products
267
Farm relief. — The farmers largely produce raw mate-
rials. When prices change rapidly, it has been observed
that the prices of raw materials go up and down ahead
of other prices. The price x situation was favorable to
farmers for the 20 years prior to 1920, but in 1920 prices
dropped sharply. The prices of farm products dropped
faster and more than the prices of the things they pur-
160
140
Farm income \ '
(Value of farm marketings)
Money income of industrial workers
(R.R., factory.and construction)
1919 70 71 72 73 7^ 75 76 77 78 79 '30 *3I '32 33
Fig. 22. — Farm income and income of industrial workers,
1919-1933.
(Bureau of Agricultural Economics)
chased, causing hard times on the farms and leading to
various governmental plans to help the farms — which
were commonly called farm relief.
Early forms of relief. — One of the first of plans for
helping the farmers was to loan them money to carry
them over until prices rose. This plan was based on the
idea that prices would soon go up. The trouble with all
of the relief plans tried between 1920 and 1932 was that
268 Marketing Farm Products
they were based on the belief that farm prices were only
temporarily low, and that if the farmers could be tided
over for a year or two prices would right themselves.
We should have realized that the supply of farm prod-
ucts had been increased as a result of the relatively high
prices of farm products during the two previous decades,
and particularly the war period. Also, the demand for
farm products as horse feed was decreased as a result
of the displacement of horses by automobiles, trucks,
and tractors. Farm relief perhaps kept the farmers from
reducing production as fast as they otherwise would have
done, and the large production helped to hold prices
down. We might say that prices of farm products were
not too low, but that the prices of the things the farmers
bought were too high. The farmers would have been
helped more if we had brought these prices down by
lowering our tariffs and by enforcing our anti-trust laws.
We did neither but, instead, loaned the farmer money.
This only got him deeper into debt, and farm mortages
increased from 7,858 million dollars in 1920 to 9,361 mil-
lion dollars in 1925.
It was also argued that farm prices were low because
of high marketing costs. To reduce marketing costs,
the government spent money in helping organize co-
operative marketing associations.
Tariffs. — The farmers were told that the manufacturer
was prosperous because of high tariffs, and that they
should have the same protection. Import tariffs on farm
products were therefore raised. It is well known that a
tariff cannot raise the prices of goods that are exported ;
the prices of such goods depend upon the prices in the
countries in which they are sold. The enactment of
tariffs on foreign farm products was thus largely a "ges-
ture" to show goodwill toward the farmers. Many have
Marketing Farm Products 269
argued that these tariffs led foreign countries to retaliate
by raising their tariffs against our farm products and so
actually injured the farmers. Whether this is true or
not; the wave of nationalism that swept over much of
the world led many countries to try to raise their own
foods and raw materials. To do this they raised their
import tariffs and in many cases paid subsidies to their
own farmers, thereby causing a marked decrease in de-
mand from Western Europe for our farm products.
This decreased demand has been one of the principle
causes of the low prices of farm products in the United
States.
Farm Board. — Next, in 1929, the Farm Board was
organized to buy up the surplus farm products and hold
them off the market until prices improved. The Board
also tried to develop new foreign markets for our surplus
farm crops. The purchases by the Board probably re-
tarded the rate at which prices dropped in 1930 and
1931; it could not, however, stop the decline. It was
finally discontinued, after costing the taxpayers many
millions of dollars, most of which was in effect taken
from the taxpayers and given to the farmers. It was
soon evident that purchases by the Board would not
raise prices and that if prices were to be raised, the
farmers must reduce production. The Board spent con-
siderable time urging the farmers to reduce acreage, but
without noticeable results.
Subsidy. — An import tariff cannot raise the prices of
goods that are exported. Many people have felt that it
was very unfair for the farmer to sell his crops at world
prices and then buy goods for his own use (that is, manu-
factured goods of various types) at prices which are
above prices in other countries because of a protective
tariff. The simplest method of removing this inequality
270 Marketing Farm Products
would be to reduce the tariff on manufactured products.
This plan, however, was not seriously considered. In-
stead, various plans were proposed for raising prices of
farm products so as to give the farmer the benefit of the
tariff. The simplest way of doing this would be by a
direct subsidy. A government-controlled corporation
could be established which would offer to buy all of a
given product at the desired price. If we wanted the
price of wheat to be $1 a bushel, this corporation would
offer to buy wheat at $1. The price would immediately
become $1, for no one would sell wheat for less than the
price the government corporation would pay for it. If
we raised 800,000,000 bushels of wheat and needed only
650,000,000 bushels for home use, the corporation would
buy and export the extra 150,000,000 bushels in foreign
countries at the prices existing there. If it received 60
cents a bushel for the wheat exported, the result would
be a loss of 40^ a bushel, or a total of $60,000,000 on
the 150,000,000 bushels exported — a loss which would be
borne by the taxpayers.
Such a subsidy would be a relatively simple and ef-
fective method of raising prices. The difficulty would be
that with higher prices the farmers would increase pro-
duction; therefore a heavier and heavier burden would
be placed on the taxpayers. For this reason, this type
of subsidy was not tried. If such a plan were introduced
to meet an emergency, there is danger that the farmers
would use all their political influence to prevent its re-
moval once the emergency had passed and that it would
have to be applied to all farm products.
Debenture plan. — The "debenture" plan was also
widely discussed. This is a plan for a subsidy, the cost
of which would be charged to the farmers and not to the
taxpayers. The loss on goods exported would be charged
Marketing Farm Products 271
back to the farmers as a reduction in the price received
for goods sold for domestic consumption. The greater
the loss on exports, the greater the charge against the
products used at home and the lower would be the net
price to the farmer. It was argued, for this reason, that
the plan would not increase production as would a direct
subsidy. It appears that a very complicated organization
would be required for the operation of the debenture
plan.
Domestic allotment plan. — It was evident that a plan
to raise prices should involve a plan for reducing pro-
duction, or at least for preventing an increase in produc-
tion. To meet this requirement, the domestic allotment
plan was proposed. Under this plan, producers of basic
agricultural commodities4 would be paid for reducing
their acreage. The idea was to reduce production suf-
ficiently to raise the prices enough to equal the tariff —
42^ a bushel on wheat, 5^ a pound on cotton, 2^ a pound
on hogs, 5^ a pound on tobacco, and ^ a pound on rice.
This plan was enacted into a law known as the Agri-
cultural Adjustment Act (AAA) on May 12, 1933.
Benefit payments to the farmers under this Act were 271
million dollars in 1933, about 600 million dollars in
1934, and nearly 500 million dollars, in 1935.
Corn-hog contracts. — The method of applying the
Agricultural Adjustment Act may be illustrated by the
1935 corn-hog contracts. If the farmer agreed to reduce
his corn acreage from 10 to 30 per cent under his average
in 1932 and 1933, he was paid 35^ a bushel for the
average yield of the land so retired from cultivation.
If he reduced the number of hogs raised for the market
4 In 1935 the following were set by the government as basic com-
modities: corn, wheat, rye, potatoes, rice, sugar beets, sugar cane
syrup, peanuts, tobacco, and hogs.
272 Marketing Farm Products
by 10 per cent of the number raised in 1932 and 1933, he
received $15 for 10 per cent of the average number of
hogs raised in these years. As popularly expressed, he
received $15 for each hog he did not raise — but only up
to the specified percentage of his average production.
Who pays the tax? — The money with which to pay the
farmers was raised by a processing tax collected from
processors and handlers of farm products. These taxes
were intended to be passed along to the consumers in
the form of higher prices, and the consumers — not the
taxpayers or farmers — were expected to pay the farmers
for reducing production. It is generally supposed that
a tax on output or sales is added to the price by the
manufacturer or merchant and passed on to the con-
sumer; but unless the purchasing power of the consumer
is increased, the higher prices reduce his purchases some-
what, so that a part of the tax is forced back on the
producer. When the AAA processing tax was imposed
on hogs, prices dropped and the farmer felt that he was
paying the tax; but after the drouth of 1934, prices
rose and the consumer then felt that he was paying the
tax. When the processing tax was declared unconsti-
tutional in January 1936, the prices of corn and wheat
declined slightly; the price of hogs increased by almost
one-third the amount of the tax; and the price of spot
cotton increased slightly, while the price for the new crop
of cotton declined in anticipation of a larger crop. These
movements might be interpreted to mean that the con-
sumers had been paying all the tax on bread, nearly all
of it on cotton, and two-thirds of it on pork.
Benefits of the AAA. — There was much controversy
over the effects and benefits of the Agricultural Adjust-
ment Act. Much may be said for the argument that the
best way to help the farmer would be to reduce the
Marketing Farm Products 27£
general price level, for this would help the farmer by
reducing the prices of the things he buys and would keep
the prices of farm products in line with world prices sc
that our surplus could be exported. On the other hand
many argue that our export markets are gone and thai
we must permanently reduce our production to domestic
requirements. It will be exceedingly difficult to reduce
the production on some crops to domestic needs. For
example, we have been exporting about one-half of our
cotton crop; if production is reduced one-half, what will
become of all the displaced labor? The high price oi
cotton under the AAA caused other countries to increase
their cotton crops and so made it harder to export Ameri-
can cotton.
Many feel that it is absolutely wrong and opposed
to the course of nature and economics to reduce produc-
tion artificially — that we cannot become prosperous by
producing less. Many feel that any plan for acreage
reduction will fail, for, if the farmer reduces his acreage,
he will cultivate the remaining acres more intensively,
He may also plant the abandoned acres in other crops,
the increased supply of which will cause low prices for
them. To prevent these difficulties, all products will
have to be brought under control; and control of such
matters would involve so much enforcement machinery
that the plan would be likely to break down under its
own weight.
Many argue that it is fundamentally wrong to place
the burden on the consumer, that it is absolutely un-
ethical to tax one group for the exclusive benefit of
another group, and that if the plan is necessary, those
benefited should pay the cost. Others argue that the
plan was justified as an emergency measure, but that
it should have been discontinued when the drouth of
274 Marketing Farm Products
1934 removed the surplus. The trouble with such emer-
gency relief measures is that those benefited do not want
them discontinued.
Do we need permanent control of agricultural output?
— Some people feel that some plan of permanent
control of agricultural output is desirable. They believe
that a large part of our export market for grain and
livestock has been definitely lost and that we must
curtail production of these products until our own popu-
lation increases sufficiently to require more food. From
this time, they argue, the problem will be to increase
output or to shift production from less profitable to more
profitable areas. We have already seen that higher prices
will quickly stimulate output. It may bring land into
cultivation that should be left in grass or forests.5 For
these reasons, the case for a permanent control of agri-
cultural production rests largely on the desirability of
moving farmers from poorer land to better land and of
placing the poorer land in forests and grass.
It has been estimated that since the World War the
substitution of trucks, tractors, and automobiles for
horses has deprived the farmers of a market for the
output of 30 million acres of land formerly used to raise
horse feed, and that lost export markets have deprived
them of the markets for the output of almost 30 million
additional acres. Yet, the increase in the population
since the World War has absorbed the output of 30
million acres, so that the excess of land in cultivation
over that actually needed for domestic requirements and
remaining export market is now only 30 million acres,
5 For example, it is said that the high price of wheat during the
World War led to plowing up much grazing land in the Great Plains
and that this has been largely responsible for the great dust storms
in recent years.
Marketing Farm Products 275
or an area equal to that formerly used to raise crops for
our lost export markets. It is argued that the farmers
should be paid to keep this acreage out of cultivation
until the population increases sufficiently (by some 10
million persons) to absorb the product. It has been
estimated that our population will become stationary at
about 150,000,000 within the next 35 years. If this
turns out to be a correct forecast, we shall need to expand
our present acreage of cultivated land by 30 to 40 million
acres in order to feed and clothe our population at the
present standard of living.
Chapter 15
Review Questions
1. What is the nature of farming?
2. What is the average size of farms in the United States?
3. What are the different types of farming in the United
States?
4. What is one-crop farming?
5. What is mixed farming?
6. What are the advantages and disadvantages of mixed
farming as compared with one-crop, or specialized, farming?
7. Why must farm products be concentrated for the
market?
8. How are farm products marketed for local consump-
tion?
9. What farm products are ready for consumption as they
leave the farm, and what products must be manufactured
before they reach the consumer?
10. Are most farm products finally used as consumers'
goods or as industrial goods?
11. What determines the supply of farm products?
276 Marketing Farm Products
12. What determines the demand for farm products?
13. Which is the more steady (inelastic), the supply of or
demand for farm products?
14. What factors determine the prices of farm products?
15. Why do not the farmers reduce supply more promptly
when prices decline?
16. What is meant by shifting production to more profit-
able crops?
17. Can the farmer forecast future prices? If so, how?
If not, why?
18. What is meant by cycles of production? What causes
such cycles?
19. What are cooperative marketing organizations?
20. What can you say of the importance of the cooperative
marketing of farm products in the United States?
21. What are the principles of cooperative organizations?
22. What are the types of cooperative organizations?
23. What are the objects of cooperative marketing among
farmers?
24. How do cooperatives attempt to reduce marketing
costs?
25. What is meant by pooling?
26. How do cooperatives attempt to increase the demand
for their products?
27. How do the cooperatives attempt to stabilize prices?
28. What is meant by orderly marketing?
29. What is necessary in order to secure a monopoly price?
30. Have the farmers been able to secure monopoly prices?
31. What is meant by farm relief?
32. Name the plans tried by the Government for helping
the farmers since 1921.
33. What plan did the Farm Board follow?
Marketing Farm Products 277
34. What was the plan of the AAA?
35. How did it work?
36. How would a direct subsidy operate? What would be
its advantages and disadvantages as contrasted with the
domestic allotment plan?
37. What do you think of the advisability of having the
government permanently try to control the price of farm
products?
Thought Problems
1. Why is farming a small-scale industry? Much is being
said today about large-scale farming. It is said that the
tractor will enable the farms to be operated on factory
principles — owned by corporations and worked by hired
employees. Do you believe that large-scale farming is prac-
tical? Do you believe that large farms operated by corpora-
tions will replace the small farm operated by the individual
owner or tenant? Give reasons.
2. To what extent is farming in the United States commer-
cialized? Are we justified in assuming without proof, as
is often done, that commercial farming is better than pioneer
farming?
3. Does the demand for farm products vary with the
prices of these products? With the general prosperity of the
country? Why, or why not?
4. Why does the price received by the farmer constitute
such a small part of the price paid by the consumers for
finished goods made from farm products?
5. Some people have expressed a fear that low prices for
farm products would make peasants of our farmers. What
is the difference between a peasant and a farmer? Do you
believe there is a danger that low prices for farm products
will make peasants out of the American farmers?
6. Can the farmer forecast future prices accurately enough
to enable him to shift production to more profitable crops?
Discuss.
278 Marketing Farm Products
7. How do cooperative organizations of farmers attempt
to raise prices for their members?
8. Can the farmers secure monopoly prices for their prod-
ucts? If so, how? If not, why?
9. Cooperatives often attempt to increase the demand for
their products. In recent years, the consumption of the
following products has increased: oranges, lettuce, and car-
rots; rayon; rubber; sugar; spinach; and canned fruits and
vegetables. The consumption of the following has been more
or less stationary: kale, parsnips, and meats; while the con-
sumption of wheat, potatoes, hay, and horses has declined.
We can eat only a certain amount of food, and the wealthy
man can eat no more than the workingman. What causes
the demand for some products to increase? To decrease?
To what extent can cooperative associations increase the
demand for the products of their members?
CHAPTER 16
Marketing Grain and Livestock
Grain
Chief grains. — Wheat, rice, corn, oats, rye, barley, flax-
seed, millet, and the sorghums are the world's most im-
portant grains. In most parts of the western world,
wheat is the most important food cereal, while rice leads
in eastern Asia. Corn, rye, barley, and millet are also
important as human foods. Corn is the most valuable
grain raised in the United States, but is used chiefly as
stock feed. Other important forage grains are oats,
barley, rye, and the sorghums.
Grain belts. — The chief grain belts of the world are:
eastern and southern Asia, Europe, central North Amer-
ica, Argentina, and southeastern Australia. Wheat is
grown in all of these areas. Rice is grown principally
in Asia. Corn is grown in North and South America
and in southeast Europe. Oats are important in both
Europe and the United States.
Wheat. — Wheat is used largely for making bread and
is the world's most important commercial grain. Europe
is the largest producer and also the largest consumer.
Western Europe, especially England, Belgium, and the
Netherlands, does not ordinarily raise enough to satisfy
its needs and is the leading importer. Central North
America comes second as a producer and first as an
exporter. Other important producing sections are Ar-
gentina, Australia, India, north Africa, and the Columbia
River basin in eastern Washington and Oregon.
279
280 Marketing Grain and Livestock
Kinds of wheat. — There are five important kinds of
wheat: hard spring, hard red winter, soft winter, white,
and durum. Hard spring wheat is high in gluten and
its flour is prized for making loaf bread. It is also used
for blending (mixing) with other wheats. Hard red
winter wheat also makes excellent flour for loaf bread.
Soft winter wheat makes flour used for quick breads and
pastry, and is blended with harder wheat for making
flour used in loaf breads. White wheat is used for bread
and pastry flours and breakfast cereals. Durum wheat
is used for making macaroni and spaghetti. It is high in
gluten but has a yellowish color, for which reason it is
shunned in the making of bread flour.
Production of wheat in the United States. — Our an-
nual wheat crop has varied from 600,000,000 to
1,000,000,000 bushels and averages some 800,000,000.
The limitation of acreage by the Agricultural Adjust-
ment Administration and the drouth of 1934 reduced
our production so much that we imported wheat in 1934,
1935, and 1936. We consume (in the form of food and
seed) five bushels per capita, or a total of close to
650,000,000 bushels, per year. In normal years this
leaves approximately 150,000,000 bushels for export. In
some years our crop of spring wheat is too small for
our needs, and we import some of this variety from
Canada. In most years we export a part of our crop
of the other varieties.
Wheat is grown pretty generally throughout the coun-
try except in the Cotton Belt, New England, and the
arid sections of the Southwest. There are two main
belts. One centers in central Kansas and spreads out
into western Oklahoma, northern Texas, and southern
Nebraska. This belt grows principally hard winter
wheat. The other includes North Dakota, northeastern
Marketing Grain and Livestock 281
South Dakota, eastern Montana, and western Minne-
sota. This belt grows largely hard spring and durum
wheats. There are three minor belts: (1) Illinois, In-
diana, Ohio, and southern Michigan; (2) eastern
Washington and Oregon; and (3) Maryland, south-
eastern Pennsylvania, and Virginia. Soft winter wheat
is grown largely in eastern United States. White wheat
is grown in New York and Michigan. Eastern Wash-
ington and Oregon raise hard red winter wheat, spring
wheat, and white wheat.
The country marketing of wheat. — In the central
part of the country, the country marketing of wheat
centers about the elevators, which handle wheat in bulk.
The elevator gets its name from an endless belt of
scoops which carries the grain to the top of the building,
from which point it is distributed by gravity into the
storage bins. Wheat is handled in sacks and stored in
warehouses in the eastern part of the country and on
the Pacific Coast. The wheat is hauled to the elevators
with horses and motor trucks. If motor trucks come
into general use, the number of country elevators will
probably decline.
For the most part, the elevators and warehouses are
operated by dealers who buy grain from the farmers
and sell to buyers in the central markets. The farmer
may sell his gr&in as soon as it is threshed, or he may
store it in his granary for an advance in price. He
usually sells to the elevator operator for cash. At
times he stores it in the elevator or warehouse and sells
later. This is a common practice on the Pacific Coast.
The charge for storage in the central states is ordinarily
from l/2j to 1^ per bushel per month.1
1 Occasionally the farmer contracts for the sale of his grain to an
elevator before it is harvested. Some farmers sell their wheat to a
282 Marketing Grain and Livestock
Types of elevators. — The elevators may be operated
by independent concerns, by large companies operating
a line (or chain) of elevators, by farmers' cooperative
associations, or by millers. The independent, or indi-
vidual, elevator is owned by a local concern which
ordinarily operates only one elevator. The farmers
cooperatively own some 3,000 elevators, which handle
Courtesy U. 8. Lfept. Agriculture.
Fig1. 23. — Country elevator. Wagons are delivering corn. The
grain is shipped on a railroad which is on the other side of the
elevator.
approximately 35 or 40 per cent of the grain marketed.
Operation of elevators. — Privately operated elevators
are in business for profit and try to buy the grain as
cheaply as they can. The price they pay is based on
the price in the central market to which they ship,
the freight rate to this market, the competition which
the elevator has to meet from other buyers, and its
operating expense. The price in the central market is
local flour mill; some ship it to a central market and have it sold
there; and some sell through cooperative associations which operate
pools.
Marketing Grain and Livestock 283
ascertained daily or hourly, and the freight rate to
the central market is known. If the elevator is to stay
in business, it must make enough money to cover these
and pay its operating expenses. If there are several
elevators at a shipping station or at adjacent stations,
they may have to pay the full market price in order
to secure the grain. On the other hand, if there is little
competition, the elevator may be able to buy the grain
at lower prices.
The price of grain varies with quality. The grade is
determined by the elevator operator inspecting the grain
to determine the amount of foreign matter, its specific
gravity, the percentage of shrunken grains, and damage
from heating.2
Sale of grain by elevators. — The country elevator con-
signs its grain to a commission man (called a "broker")
in a central market who sells it on a commission basis
or sells it outright to a grain merchant or to a manu-
facturer. More than two-thirds of the grain is con-
signed to "brokers/' who receive and sell the grain. They
deduct their commissions and the expenses of freight,
inspection, and weighing, and send the balance to the
elevator operators.3
Buyers in the central markets send out offers to the
country elevators. These offers may be for grain "on
2 Complaints of improper grading are heard at times. There are two
important complaints regarding proper grading: first, that the elevator
operator pays all farmers the same price, thus penalizing the farmer
with a high grade of grain; second, that the elevator operator under-
grades the grain. He may promise a farmer $1 for No. 2 wheat. This
may be a fair price. Yet when the farmer delivers the wheat, the
elevator may say that it is No. 4 and pay only 96 cents. The farmer
is often unable to tell whether or not his grain is properly graded.
3 Very commonly the elevator ships the grain on an order bill of
lading with a sight draft attached for some 75 per cent of the value
on the day of shipment. In this case the "broker" deducts his ex-
penses from the other 25 per cent.
284 Marketing Grain and Livestock
track" or "to arrive." "On track" means that the price
applies f.o.b. at the country shipping point, while a
"to arrive" sale means that the country elevator must
pay the freight to the central market.
Terminal marketing of grain. — The principal middle-
men or institutions involved in the terminal marketing
Fig. 24. — Terminal elevator. This particular elevator is located
in -a harbor where vessels are loaded for export. The grain is re-
ceived by rail, and may be shipped by water or rail.
of grain are the grain dealers, brokers, cooperative sales
agencies, terminal elevators, millers and other manu-
facturers, exporters, and the grain exchanges.
The grain dealer is often a merchant, a commission
man, a broker, and sometimes an elevator operator. As
a merchant he buys and sells grain on his own account.
As a commission man he receives and sells grain on
consignment. As a broker he negotiates contracts for
the purchase or sale of grain for others. He buys from
the country elevators and sells to terminal elevators,
to millers, and to brokers representing millers, manu-
Marketing Grain and Livestock 285
facturers, and exporters; he is often a member of the
grain exchange and sells on the floor of the exchange
The terminal elevators often buy grain for storage,
hoping to sell it later at a higher price. They also store
and condition grain for others for a fee. By "condi-
tioning" grain is meant drying, cleaning, cooling, and
bleaching. By mixing and conditioning, the grade of
wheat is often raised. Some No. 2 wheat may be mixed
with No. 1 wheat without lowering the grade of the
lot to No. 2. Over a period of years, 46 per cent of the
wheat received by a group of Chicago elevators was
graded No. 1 and No. 2. Yet during this same period,
95 per cent of the wheat sold by these elevators was
graded No. 1 and No. 2.
The operations of grain exchanges were discussed in
Chapter 8.
The price of wheat. — The price of wheat is determined
by the supply and demand throughout the world. The
price received by American farmers may, in normal
times, be affected more by the size of the crop in Europe
than by the size of the American crop. The size of the
crop in the European countries determines very largely
how much wheat they will have to import. The sur-
pluses for export in the United States, Canada, Argen-
tina, Australia, India, North Africa, and Russia are also
very important. The supply and demand factors center
on the floors of the grain exchanges, notably those in
Liverpool and Chicago, where the actual prices are de-
termined. It has been said that if the world crop is
10 per cent below the average, the price will rise 15 per
cent; whereas if the world crop is 10 per cent above the
average, the price will drop from 9 to 12 per cent.
Cost of marketing wheat. — The price paid the farmer
by the country elevator, according to a comprehensive
286 Marketing Grain and Livestock
study, averages 77 per cent of the price paid by the
mill, 44 per cent of the retail price of flour, and 13 per
cent of the retail price of bread.
Production of corn. — The total value of our corn crop
is larger than the total value of our wheat crop. The
United States produces about 70 per cent of the world's
corn, and our crop averages some 2,800,000,000 bushels.
Corn requires a hot, moist climate during the growing
season. It is grown generally throughout the country
east of the Rocky Mountains. Production, however,
centers in the Corn Belt, which includes Iowa, northern
Illinois, northern Indiana, western Ohio, south western
Minnesota, south eastern South Dakota, eastern Ne-
braska, and parts of Missouri, and Kansas. These states
grow approximately two-thirds of our total crop.
Uses of corn. — Most corn is marketed on the hoof —
that is, it is fed to livestock and reaches the consumer in
the form of meat. Our corn crop is used approximately
as follows:
Per Cent
Fed to livestock on farms:
Hogs 40.0
Horses and mules 20.0
Cattle 15.0
Poultry and sheep 5.0
Total 8OO
Fed to livestock off farms 5.5
Human food on the farms 3.5
Ground into meal •. 3.0
Starch, glucose, corn, sugar, etc. . . 2.0
Grits 1.0
Exported 1.5
Miscellaneous 3.5
TOTAL 100.0
It will be seen from these figures that more than 85
per cent of the corn is fed to livestock. The farmers in
two sections sell corn: (1) eastern Illinois; and (2)
Marketing Grain and Livestock 287
northwestern Iowa and eastern Nebraska. In other sec-
tions the farmers use their corn for feed and sell hogs
or cattle. Some corn is exported by Argentina, the
United States, and Roumania, principally to the coun-
tries of western Europe.
Price of corn. — Supply very largely determines the
price of corn, and the supply depends upon the present
crop plus the carry-over from previous years. The
weather and the acreage planted very largely determine
the size of a crop. A close relation exists between the
rainfall in the Corn Belt during July and August (the
growing season) and the price of corn. According to
H. A. Wallace, it takes one inch of rain each ten days
during July and August to hold the price of corn steady.
If the rainfall is considerably above this figure, the price
of corn will drop, while a deficiency in rainfall causes
prices to rise. A corn crop 20 per cent above the average
will reduce the price 20 or 25 per cent, while a crop
20 per cent below the average will raise the price some
40 per cent. A small crop thus has a total value larger
than that of a large crop.
Cooperative marketing associations. — Approximately
3,000 cooperative country elevators, with a half million
or more members, did a business of about $275,000,000
in 1933-34. The farmers' elevators do on the average
a 50 per cent larger business than the privately operated
elevators. This larger volume of business often gives
the farmers' elevator a lower handling cost per bushel.
These elevators try to help the farmers by efficient op-
eration, fair grading of the grain, and the elimination
of the 'private elevator's profft. An elevator can sell
its grain immediately or hold it in storage and hedge
against a drop in price. For these reasons, farmers'
elevators often buy the grain outright from the farmers,
288 Marketing Grain and Livestock
instead of handling it on a pooled basis. Many of the
cooperative country elevators are, at this writing, affil-
iated with the Farmers National Grain Corporation,
which is engaged in the terminal marketing of grain.
Livestock
Production of livestock. — The United States is one
of the leading producers of livestock and one of the
leading consumers of meat. We are second to India in
the production of cattle; second to China in the produc-
tion of hogs; *and third in the raising of sheep, coming
after Australia and Russia.
The number of the different kinds of livestock on
American farms was as follows in January 1935: cattle,
61 million; sheep, 50 million; hogs, 37 million; and
horses and mules, 17 million. The number of hogs was
abnormally low because of reduction under the AAA
program. In good years our farmers sell close to three
billion dollars worth of livestock annually, excluding
dairy and poultry products. The United States formerly
exported large quantities of meat, but, as our population
has increased, the export of meat has declined.
Consumption of meat. — The per capita consumption
of meat in the United States in a recent year was 151
pounds, divided as follows: pork, 73 Ibs.; beef, 51 Ibs.;
lard, 14 Ibs. ; veal, 7 Ibs. ; and lamb and mutton, 6 Ibs.4
4 The consumption of meat varies somewhat from year to year with
the supply and price. The demand for various kinds of meat varies
somewhat between different racial, economic, and religious groups;
different sections of the country; and different seasons of the year.
Americans, Irish, Germans, Scandinavians, and Negroes are heavy pork
eaters. Pork is typically the meat for the working group. The ortho-
dox Jew eats no pork and only the forequarter of beef. Anglo-Saxons,
Greeks, and Armenians are heavy consumers of mutton. Veal ig^opu-
lar with the Jews and Slavs. Fewer heavy cuts of meat are wanted
for home consumption than a generation ago, owing to smaller families,
Marketing Grain and Livestock 289
Livestock sections. — Some livestock is raised on
almost all farms. The production, however, is much
more important in some sections than in others. Beef
cattle are important in practically all states west of
the Allegheny Mountains, but Texas, Nebraska, and
Iowa are the leading producers. Hogs are raised in
practically all farming sections east of the Rocky Moun-
tains, while small numbers are raised in the Pacific
Coast states. Commercial production, however, centers
in the Corn Belt. Nearly half of the hogs are raised in
Iowa, Illinois, Indiana, Ohio, Missouri, and Nebraska.
The hog is the most efficient meat producer among our
animals. He requires only one- third as much food to
produce a given number of calories of human food as
the steer; but he needs concentrated food, and corn is
especially adapted to his needs. He is not a range
animal. Cattle, on the other hand, can be raised on land
unsuited to cultivation. Sheep can eat shorter grass
than cattle, can be raised on drier land, and are often
grazed on the high and rugged mountains. They are
important in Texas and in the Rocky Mountain and
Pacific Coast states. They are also important in certain
areas in the East, notably Ohio, southern Michigan,
north central Kentucky, and southwestern Pennsylvania.
Concentration of livestock. — Livestock is concentrated
at two points — in country shipping and concentration
yards and in central markets. There is a considerable
movement from one central market to another, and
young and lean cattle are also shipped back to the farm
from the central markets for maturing and fattening.
small apartments, and light housekeeping. Fewer heavy cuts are
wanted in hot weather. Less beef and pork are consumed during the
Thanksgiving and Christmas holidays, owing to the consumption or
poultry.
290 Marketing Grain and Livestock
The stock is brought to the country shipping station
by truck or is driven in on foot, and it is transported
from the country shipping station to the central markets
by rail. A very large proportion is brought into the
central markets by truck direct from the farms, thus
eliminating assembling at country stations.
^ • - L ; ' ; ' ^"v
uounesy u. &. uepi. agriculture.
Fig. 25. — Loading stock into railroad cars for shipment.
Older methods of marketing livestock. — Before the
building of the railroads, livestock was driven to market
on foot, often for hundreds of miles; or was shipped
by water. When the railroads were built, most stock
was shipped by rail. Two types of middlemen came to
operate at country stations to assemble and ship the
livestock to central markets — private livestock buyers
and cooperative shipping associations. The livestock
buyer is in business for profit. He buys the stock from
the farmers, drives or hauls it to the shipping station,
Marketing Grain and Livestock 291
loads it into cars, and consigns it to commission men
in the central markets who sell it to the packers. The
cooperative shipping association operates in somewhat
the same way, except that it acts as the agent for the
farmer, and usually does not pay him until the stock
is sold and the money received from the commission
merchant. The purpose of the association is to secure
higher prices for the farmers. The manager watches
price movements and tries to pick advantageous times
and markets in which to sell. When he feels it is a good
time to sell, he consults his members, and if they agree
a shipment is made. It is consigned to a commission
man or to a cooperative commission agency. At one
time there were 5,000 of these cooperative shipping
associations — but with the increased use of motor trucks
the number has declined to fewer than 1,500.
Newer methods of marketing livestock. — Changes in
the method of marketing livestock came with the motor
truck and with the packers' coming to buy stock in the
country and shipping it direct to their plants.
Truck shipments. — At this writing, about three-fifths
of the cattle, calves, and hogs are brought to the central
markets by trucks. The trucks usually are loaded on
the farms and bring the stock to central markets, where
it is sold by commission men for the farmers. Trucking
saves hauling the stock to country points and loading
into cars, and it is often quicker than rail shipment,
especially for distances under 200 miles. This means
less shrinkage. On the other hand, truck shipments
increase somewhat the marketing expenses in the central
markets owing to the smaller lots in which the stock
is handled.
Concentration yards. — For long distances rail trans-
portation is cheaper, while for short distances the truck
292 Marketing Grain and Livestock
is cheaper. This fact has led to the development of
concentration yards, at various country points, to which
livestock is hauled by truck from one or more counties.
The yards are operated by packers, cooperative associa-
tions, or private parties. The stock is sold by the farmer
to the operators, except that the cooperatives often
handle it on an agency basis. Shipment from these
yards to central markets is usually made by rail. The
development of these concentration yards seems logical,
and they have continued to grow.
Direct marketing. — The large packers have had diffi-
culty in securing enough stock in the central markets
to enable them to operate their plants at capacity,
because of competition with local packers who are closer
to the sources of supply. To secure adequate supplies
they send their buyers to the country to buy stock from
farmers, independent buyers, and cooperative associa-
tions. This stock is often shipped direct to the packing
plants — unloaded at their plants or handled through the
stockyards. This is known as "direct marketing/' and
the animals are called "directs" when they reach the
central markets. Direct marketing apparently reduces
marketing cost somewhat, as it eliminates the commis-
sion man.5 It has grown until something like one-half
of the hogs, one-fourth of the calves, one-fifth of the
sheep, and one-sixth of the cattle are shipped direct to
the packers.
5 It is argued, however, that the farmer who sells his stock to a
packer in the country often receives a lower price than he would in
a central market, owing to the farmer's ignorance of grades and prices
and the absence of competitive bidding at many country points. On
their side, some packers say that stock bought direct costs them some-
what more than stock bought in the central markets, for they pay a
price in the country that is so near the city price that it does not
allow for the full transportation cost.
Marketing Grain and Livestock
293
Central markets. — When the stock arrives in a central
market, it is unloaded in the stockyards, placed in pens,
and fed and watered, unless it is consigned to packing
plants which have unloading facilities. The stockyard
operator charges for the use of his facilities and for the
feed consumed.
Courtesy Swift & Co.
Fig. 26. — Stockyards in central market where livestock is re-
ceived from the country and sold by commission men to packers.
Sales are also made to yard traders, and to order-buyers for shipment
to other markets.
Commission men. — The stock is ordinarily consigned
to a commission agency for sale. There are two types of
agencies: the private commission company and the
cooperative commission company controlled by the, pro-
ducers. The commission man has charge of the stock
and sells it for the account of the shipper. He pays the
freight and other charges, deducts his commission, and
remits the balance of the money received from the sale
of the stock to the shipper. In 1934, there were 41
294 Marketing Grain and Livestock
cooperative commission agencies, which did a business
of $148,000,000. They generally charge the same rate
of commission as the private agencies and return their
profits to the shippers as patronage dividends. The
commission companies have salesmen who are good
judges of livestock and prevailing values. These sales-
men follow prices closely from hour to hour, and they
know the buyers for the packing plants. They often
specialize, one man selling only one kind of stock, as
fat steers, butcher cattle (lower grade animals), hogs,
or sheep; they thus become experts in judging qualities
and values. Even though the owner accompanies his
stock to market, he usually has it sold by a commission
man.
Buyers of livestock. — The livestock is sold to packers,
to order buyers, and to yard traders.
Reshipment of stock. — Many of the consuming mar-
kets, especially those along the Atlantic Seaboard, do
not receive enough livestock direct from the country
shipping stations to supply their needs. The packers
in these markets must therefore place orders with buyers
in other markets and have the stock shipped to their
plants. Much livestock is shipped from one market to-
another; for example, East St. Louis, Chicago, Sioux
City, and Omaha ship a considerable portion of their
hogs to other markets. The buying to fill these orders,
is done by order buyers — men who specialize in this
work — or by the buying departments of commission com-
panies. Some livestock is shipped from primary markets
to farmers for fattening or further growth. These are
known as feeders and stockers.
Yard traders. — Yard traders, also called scalpers and
speculators, buy stock from the commission men and
sell to the packers and order buyers through the com-
Marketing Grain and Livestock 295
mission men. They buy when they think prices are
going to rise and hold the stock a few days hoping to
make a profit from higher prices. Hence the name
"speculator." 6
The yard traders also perform a grading function.
The packers prefer to buy stock in lots of the same
quality. Many mixed cars containing different kinds
or grades of stock are received at the markets. The
yard traders often buy these mixed cars and re-sort
the stock into lots of uniform quality.
Cost of marketing. — The typical consumer's dollar
spent for meat is divided as follows: to the farmer, 50^;
for marketing livestock, 10^; to the packer, 20^; and
to the retailer, 20^*.
Prices. — The price of livestock depends upon demand
and supply. The demand for livestock is determined
by the demand for different cuts of meat and for the
different by-products. The demand varies somewhat
with fashion, price, and prosperity, but the demand is
much more stable than the supply. The supply varies
over a period of years with price. When prices are high
the producers raise more stock; when the prices are
low they raise less stock. In the past this has given
rise to a more or less definite series of cycles. The
cyclical movement of supply and prices will be illus-
trated by prices of corn and hogs.
Corn-hog ratio. — Hogs are fed largely upon corn.
Since it takes about 11.5 bushels of corn to put 100
pounds of weight on a hog, there is a more or less definite
relationship between the price of corn and the price of
6 Their existence is partially explained by the uneven receipts of
stock on different days of the week. These receipts are much heavier
during the first part of the week than during the latter part of the
week.
296 Marketing Grain and Livestock
hogs. Over a 50-year period, the price of 11.3 bushels
of corn has equalled the price of 100 pounds of live hog
at Chicago. The ratio between the price of corn and
the price of hogs, however, varies widely from time to
time. At one time the price of 7.4 bushels of corn has
equalled the price of 100 pounds of hog, while at another
time it has taken 16.5 bushels of corn to equal the price
of 100 pounds of hog.
The relationship between the price of corn and the
price of hogs is called the corn-hog ratio. If the price
of corn is high relative to the price of hogs, the farmers
want to sell corn, as it is worth more on the market than
as hog feed. Conversely, when the price of hogs is high
relative to the price of corn, the farmer prefers to sell
hogs.
The corn-hog ratio indicates whether it is more profit-
able to sell corn or hogs. If the ratio is below the
average, there is more profit in corn than hogs; if the
ratio is above the average, it is more profitable to feed
the corn and sell the hogs. The average monthly ratios
should be watched carefully by hog raisers. The average
monthly ratios for a 50-year period are as follows:
January 11.8 May 10.9 September. . . .11.3
February 12.4 June 10.9 October 11.2
March 12.3 July 11.0 November. . . .10.5
April 11.8 August 10.9 December .... 10.9
Thus if in November the price of corn is 80^ and
the price of heavy hogs is $9.25 (Chicago prices), it
is more profitable for the farmer to feed his corn to hogs
and sell the hogs. On the other hand, if the price of
corn is 80^ and the price of hogs $7.75, it is more
profitable for the farmer to sell his corn.
Marketing Grain and Livestock 297
Use of corn-hog ratio. — In order to have hogs to sell
when hogs are profitable and corn to sell when corn is
profitable, it is necessary to forecast prices. It takes
something like a year to raise pigs and have them fat-
tened for the market. Prices must, therefore, be antici-
pated by a year or more.
One authority gives this advice: When the corn-hog
ratio has been below the average for several months or
a year (say 6 to 15 months), the farmer should raise
more pigs. When the corn-hog ratio has been above the
average for several months or a year, he should reduce
the number of pigs.
The farmer is advised to increase his production of
pigs when hogs are less profitable than corn and to
decrease his production of pigs when hogs are more
profitable than corn. The advice is based on the assump-
tion that, when corn is high relative to hogs, most
farmers will cut down the number of hogs raised so
that they can sell more corn. This will mean that
within about a year the ratio will change. On the other
hand, when corn is cheap relative to hogs, the assump-
tion is that most farmers will increase the number of
pigs. When this extra supply of pigs reaches the market,
the price will drop. The farmer is thus advised to
increase production when prices are low and to decrease
production when prices are high. The individual farmer
thus attempts to follow a course opposite that followed
by the majority of farmers. This advice appears to be
good as long as the majority of farmers act as expected.
If, however, the majority of farmers should follow this
advice, prices would not move as anticipated, and the
advice would no longer be good. A new method of
forecasting would be needed.
298 Marketing Grain and Livestock
Chapter 16
Review Questions
1. What are the world's principal grains?
2. Where are the world 's main grain belts?
3. Locate the main wheat belts of the world.
4. What are the different kinds of wheat? Where is each
kind grown? What are the uses of each kind?
5. What position does the United States occupy in the
production of wheat? In the export of wheat?
6. Where are the leading wheat-producing sections in the
United States?
7. How is wheat marketed at country points?
8. What are the various types of country elevators?
9. How is wheat graded at country points?
10. How does the country elevator sell its grain?
11. How is grain marketed in terminal markets?
12. What services do the terminal elevators perform?
13. What factors influence or determine the price of wheat?
14. What position does the United States occupy in the
production of corn?
15. What are the chief uses of corn?
16. How is corn marketed?
17. What determines the price of corn?
18. How important are farmers7 elevators? How do they
operate?
19. How does the United States rank in the production of
livestock?
20. Locate the main producing sections (U. S.) for beef
cattle and for hogs.
21. What are the differences in the conditions under which
hogs, cattle, and sheep are raised?
Marketing Grain and Livestock 299
22. How is livestock transported to country markets? To
central markets? What are concentration yards? Why have
they developed?
23. How is livestock marketed at country points?
24. What functions are performed by livestock buyers and
shippers?
25. What is meant by "direct marketing" of livestock?
Why is stock marketed in this way?
26. How is livestock marketed in central markets?
27. How do commission companies operate? What func-
tions do they perform?
28. What is meant by order buying?
29. What are stockers and feeders?
30. What are yard traders? What functions do they per-
form?
31. What is the corn-hog ratio?
32. How can the corn-hog ratio be used by the farmer?
33. If No. 2 corn is 40^ and heavy hogs are $5.60 in
Chicago, what is the corn-hog ratio?
34. What determines the prices of livestock?
Thought Problems
1. The United States has a tariff on the importation of
wheat. This law was enacted to help the wheat farmers.
Does it help them? Why or why not? Can our grain
farmers secure higher prices through tariffs?
2. If a farmers' cooperative elevator undergrades the grain
purchased from its members, are they injured by such action?
3. Americans consume very little rice. Why? Would
a larger consumption benefit the growers? Could the rice
growers induce the consumers to eat more rice? If so, how?
If not, why?
4. What functions are performed bv country elevators?
300 Marketing Grain and Livestock
5. Can the livestock producers increase the consumption
of meat?
6. What effects do the following have on the demand for
various kinds of meat: Smaller families? Women working
for wages outside of the home? Small apartments? Increase
in the purchase of ready cooked foods? The increasing habit
of eating in restaurants? The continued substitution of
power-driven machinery for human muscle? The prevailing
fashion for figure, e. g., to be slender or stout?
7. (a) If corn is 50^ and hogs are $6.00 in November, is it
more profitable to sell corn or hogs? If the ratio remains at
this point for more than a year, what should the Corn Belt
farmer do?
(b) If corn is 60^ and hogs are $5.00, what is the corn-
hog ratio? If the ratio remains at this point for months, what
should the Corn Belt farmer do?
CHAPTER 17
Marketing Dairy Products
Value. — The dairy cow is the greatest producer of
wealth on American farms. The 25,000,000 dairy cows
in the country produce over 100 billion pounds of milk
annually, which, with the products made from it, nor-
mally has a value of over $2,000,000,000. The milk is
consumed approximately as follows:
Per Cent
Fluid milk 47
Butter 36
Ice cream 4
Cheese 3
Condensed milk, powdered milk, casein,
milk chocolate, etc 4
Fed to calves and wasted 6
Perishability. — Fresh milk is perishable and must be
consumed promptly or manufactured into butter or other
products. Butter can be kept at very low temperatures
and can therefore be stored for considerable periods with
little deterioration. Consumers make little distinction
between fresh and storage butter, for which reason the
price of butter fluctuates less than that of many other
perishable products.
Production. — Milk is produced on the great majority
of the farms. On specialized dairy farms milk is the
chief product sold, but a very considerable portion of
the milk and cream of the country is produced on
farnr ^hich raise other products. Milk and cream must
301
302 Marketing Dairy Products
be assembled from over wide areas, and their perish-
ability makes it necessary for them to reach the market
promptly. Milk is produced the year around, but pro-
duction is much higher in the spring and summer than
in the fall and winter, shipments being 30 to 60 per
cent higher in July than in January.
Demand. — Most consumers want about the same
quantity of milk and butter each day. Price affects
demand, especially the demand for butter.
Marketing fluid milk. — The perishability of milk leads
to a large production near the market. So we find a
large number of dairy cows near large cities, particularly
in the North Atlantic states, to supply the large popu-
lations of the eastern cities.
Concentration of milk. — Milk is transported by truck
from the farm to the city milk plant or to the country
receiving station. The use of trucks has lessened the
need for country stations, as milk is often hauled direct
from the farms to city milk plants for distances of 50
miles and more. Country receiving stations are, how-
ever, still important in the outlying portions of the
producing areas. The milk is cooled in these stations
and transported to the cities by rail or in insulated
tank trucks. Some country stations pasteurize and bottle
the milk.1 Cream has a higher value per pound than
milk and so is transported for greater distances. Boston,
for example, receives cream from states as far distant
as Michigan and Tennessee.
The city milk distributors usually buy the milk from
the farmers and have it hauled to their plants, although
some farmers deliver it themselves. At times coopera-
tive associations or private buyers receive the milk from
10ne large chain store, for example, has its milk pasteurized and
bottled in the country, so that no city milk plants are needed.
Marketing Dairy Products 303
the farmers and sell it to the distributors. In the mar-
keting of sweet cream, creameries, brokers (sales agents),
and wholesalers operate in the marketing process.
Dispersion of milk. — Milk is sold to the consumers by
milk dealers, retail stores, farmers, and cooperative as-
sociations. The milk dealer often buys the milk from
the farmer, pasteurizes and bottles it, and delivers it on
the consumer's doorstep. He often supplies stores, res-
taurants, hotels, hospitals, soda fountains, and ice cream
manufacturers. Some milk is also sold to "sub-dealers"
who deliver it to the consumers. The consumer usually
buys his milk from a dealer or a store, so that only one
or two middlemen are involved. If he buys from the
farmer, no middleman is involved.2
Cooperative associations. — There are approximately
185 cooperative associations, with a membership running
into the hundreds of thousands, interested in the market-
ing of fluid milk. There are two types of associations:
bargaining and operating. The bargaining association
represents the farmers in negotiating prices and terms
with the dealers, but it does not handle the milk, which
is delivered to the dealers, and the farmers receive their
pay from the dealers. The bargaining association may
be compared to brokers who negotiate sales contracts
with buyers, or to labor unions which negotiate wage
scales with the employers. In addition to negotiating
prices and terms, the association may guarantee pay-
ment by the dealers, may audit the dealers' books to
see that full payment is made, may check the dealers'
butter fat tests, and may organize and supervise the
operation of pools. In 1933 there were 80 bargaining
2 Three, or even four, of the following middlemen may, however, be
involved: the cooperative association or country buyer, the broker,
the dealer, the sub-dealer, and the restaurant or store.
304 Marketing Dairy Products
associations which were responsible for the sale of
$131,000,000 worth of milk.
Operating associations, on the other hand, actually
handle the milk, selling it at wholesale to dealers or at
retail to the consumers. They may sell all the milk
to the dealers; may sell a part to the dealers and have
their own plants for manufacturing the surplus; or
may sell the surplus to manufacturers. In 1933 there
were 105 operating associations, with sales totaling
$81,000,000.
Price. — Milk is the only major farm product that has a
controlled price.3 The prices of most farm products
are determined on open and free markets by supply
and demand. This is true of butter but not of fluid
milk, the price of which is often determined by agree-
ments between milk dealers and cooperative associations.
In the depression of the early 1930's, the purchasing
power of the consumers was so low that the price of
milk was forced down in some markets until it cut into
the profits of the dealers and farmers. In several states,
milk boards were established at the request of the pro-
ducers and dealers in the hope that they would raise
prices and prevent price cutting. In some states these
boards are given the right to fix prices and to examine
the dealers' books. These states apparently consider
the milk business a public utility and intend to regulate
it accordingly.
In order to control the price of milk, it is necessary
to control the supply. This is attempted by the classi-
fication and base-surplus methods of paying the farmers,
which are discussed below. Under the base-surplus plan,
the farmers' sale of milk on the fluid market may be
limited to the amount of his base or quota. At times
3 Aside from price control by the government.
Marketing Dairy Products 305
producers have not been allowed to increase their bases,
and bases have been refused to new producers. Ex-
pensive fixtures and equipment have also been required
of the producers in some markets in the hope of forcing
small producers off the market and preventing new pro-
ducers from entering the market. Boards of health and
milk boards have at times been induced to undertake
the enforcement of such regulations. Reasonable sani-
tary regulations are desirable to protect the health of
the consumers, but the regulations in force in some
markets cannot be justified by this reason.
In considering the price of milk, we should remember
two factors: first, the seasonal variation in production,
commonly called "the surplus problem" ; and second, the
fact that the price of fluid milk is often higher than its
value for manufacture into butter or other products.
Basis of paying farmers : Flat price. — The dealers may
pay the farmers a flat rate for their milk — so much
per 100 pounds or per quart. The dealers may buy
only enough milk to supply their customers. If they
buy more than this amount, the price paid the farmers
will be based on the average price received for fluid
milk, cream, and manufactured products. This is the
simplest method of paying the farmers and many farmers
prefer it for this reason. This plan, however, does not
encourage the farmer to produce an even supply through-
out the year, since he is not penalized for a low pro-
duction in winter and since he receives the specified
price for heavy production in summer.
Classification plan. — The dealers often buy more milk
than they are able to sell in fluid form. The surplus
may be sold as cream or may be manufactured into ice
cream, cheese, or butter. Milk is worth different prices
for each of these uses. Instead of paying the farmer
306 Marketing Dairy Products
a flat rate based on the average price received, the dealer
often pays the farmer a different price for the amount
used in different ways. This is known as the classifica-
tion, or use, plan. A dealer may sell 60 per cent of his
milk as fluid, sell 10 per cent as cream, and manufacture
30 per cent into butter. The price agreed upon for
fluid milk (Class I) may be $2.50 per 100 Ibs., the price
for cream (Class II) $1.50, while the milk may be worth
$1.00 for butter making. If a farmer delivers 10,000
pounds of milk during a given month, he will receive
$2.50 per 100 Ibs. for 6,000 pounds; $1.50 per 100 Ibs.
for 1,000 pounds; and $1 per 100 Ibs. for 3,000 pounds;
or a total of $195. This is an average, or blended, price
of $1.95 per 100 pounds.
The advantage claimed for this plan as compared with
the flat price is that the farmer knows that if he
increases his production he will receive a lower price
for the additional amount. The plan thus attempts
to limit the supply. The farmer, however, bases his
operations upon the average (blended) price received.
If this is above the cost of production, he will increase
his output. This gives the dealers more surplus, which,
it is argued, they are in a poor position to handle as
compared with specialized manufacturers. It also in-
creases the production of milk used in making butter in
areas near large cities, where costs of production may
be higher than in other sections of the country. In
order to maintain the average price at a profitable level,
the marketing association often tries to boost the price
of milk for the fluid market as high as the traffic will
bear — that is, to the level of a monopoly price.
The farmers often dislike the classification plan be-
cause they do not know in advance how much they will
receive for their milk. They must also trust the dealer's
Marketing Dairy Products 307
honesty for proper payment, unless the cooperative as-
sociation audits his books. This may be important,
since it is highly profitable for the dealer to pay for
milk in a lower class than that in which he uses it.
Base-surplus plan. — The base-surplus plan was
adopted to induce the farmer to even up his production
throughout the year. Under this plan each farmer is
given a base, or quota. The base may be his average
production during the months of October, November,
and December (often the months of lowest production).
For the basic quantity produced the farmer is paid the
fluid, or Class I, price, while he receives a lower price
for the surplus. This is a direct inducement to even
up the supply throughout the year in order to receive
the higher price for all of his milk, and the plan has
been successful in getting the farmers to do this.
As the Class I price has often been above the cost
of production, the base-surplus plan has not limited
the supply to the needs of the fluid market. For this
reason, the plan has been combined with the classifica-
tion plan in many markets. Under the combined plan
the farmer is paid for his base milk according to the
use to which it is put; that is, the farmer may not
receive the Class I price for all of his quota. As different
farmers produce different percentages of their bases, the
average price paid to different farmers selling to the
same dealer varies. This makes a very complicated
system — too complicated for the farmers to understand
and too complicated to try to explain here.
High prices. — From the above discussion it is clear
that the milk producers through their associations have
often tried to secure high prices for their milk — in some
instances all the "traffic would bear/' or monopoly prices.
In some cases where the dealers have refused price
308 Marketing Dairy Products
increases, "milk strikes" have been called. As milk
is perishable and the cities have little milk in reserve,
the farmers have often been given higher prices for
their Class I milk. However, canned milk has just as
high food value as fluid milk, and reconstituted milk
can also be made from skim milk powder and butter,
which, we are told by experts on foods, is just as
nutritious as fresh milk. Milk can now be transported
for hundreds of miles in insulated tank cars. These
factors may, in the future, seriously limit the power of
farmers near large cities to secure high prices for their
milk.
Proper price basis. — It would seem that the price of
milk sold upon the fluid market should be based on the
price of butter,4 with a sufficient difference to cover the
extra costs of special care and handling and of the
equipment required to meet city health requirements,
and to cover the value of the skim milk which leaves
the farm.
Other factors. — The price paid the farmer is usually
based on milk with a specified percentage of butterfat,
perhaps S1/^ per cent. The farmer is paid a premium
for excess butterfat, while a deduction is made for a
deficiency. The farmer may receive a premium for
producing milk which has a very low bacterial count
(grade A).
The consumer. — The consumer wants safe milk at a
reasonable price. Milk is often tested for percentages
of butterfat and examined for the number of bacteria.
The cows are often tested for tuberculosis and other
diseases, and the barns and plants are inspected for
4 Some feel that the price paid for milk by condenseries would be
a, better guide.
Marketing Dairy Products 309
cleanliness. In some markets, inspection by the health
departments is strict, while in others, there is little or
no inspection. The consumer's main protection against
a high price has been competition among farmers and
distributors. His weapon is reduced consumption when
the price seems too high.
Cost of marketing milk. — Milk must be kept cool,
moved quickly, and delivered to the consumers in small
quantities. On the other hand, it is marketed regularly
during the year, which means that distributing facilities
can be steadily employed. The farmers generally receive
something like one-half of the price paid by the con-
sumers. Figures showing the cost of marketing milk
in four cities follow:
Chicago St. Louis Peoria Quincy Average
Farmer received 45.7# 51 .4# 65.9^ 69.2ff 46.9ff
Purchasing, receiving, and
processing 15.2 10.8 16.3 12.3 14.9
Selling and delivering 32.1 29.9 9.9 12.5 31.2
General and administrative . 3.5 2.8 6.2 3.2 3.6
Dealer's profit 3.5 5.1 1.7 2.8 3.4
Consumers pay lOO.Off lOO.Off lOO.Off lOO.Off lOO.Off
It will be observed that the marketing cost was higher
in the large cities than in the small cities. This may be
due to the higher wage scales, the greater distances that
milk must be transported, and the larger areas over
which it must be delivered. The consumers in the
smaller cities often receive their milk at lower prices
than those in the large cities.
Marketing butter. — There are two kinds of butter:
farm butter and creamery butter. Farm butter is made
on the farm and consumed to a large extent on the
farm. One-fourth of the butter is made on the farms,
310
Marketing Daily Products
but only ten per cent of the butter upon the market
is farm butter. It is sold for local consumption by the
farmer, delivering to the consumer or selling to the local
grocery store, or to produce dealers. The produce dealers
ship some of it to the city markets in barrels.
Courtesy U. S. Dept. Agriculture.
Fig. 27. — A small creamery located in the dairy country. A
largo portion of our butter is made in such creameries.
More than one and a half billion pounds of creamery
butter are manufactured annually by nearly 4,000
creameries. Approximately one-third of the creameries,
marketing 35 per cent of the creamery butter, are coop-
eratively owned by the farmers. The Middle West is the
leading butter-producing section, with Minnesota, Iowa,
and Wisconsin the most important states. Large
amounts of butter are also produced on the Pacific Coast.
Creameries are of two kinds: small local creameries,
drawing their milk or cream from nearby farmers; and
Marketing Dairy Products 311
large creameries, or centralizers, which draw their cream
from large areas, sometimes for hundreds of miles. To
assemble cream from large areas, cream station middle-
men are necessary. Most cream stations are agents for
the centralizers, but about 10 per cent are independent
dealers. They buy cream from the farmers, test (grade)
it for butterfat and acidity, pay the fanners, and ship
it to the creameries.
Trade channel for butter. — Butter sent to the large
cities is generally shipped by the creamery to a wholesale
dealer, to a commission man who sells it on a commission
basis, or to the creamery's branch house.5 The broker
may be used as the salesman. The wholesalers sell to
jobbers, chain stores, large hotels, and other large buyers;
the jobbers sell to the small retailers and restaurants.
Many wholesale receivers are also jobbers. Many of the
large centralized creameries have their own branches,
in the larger cities, which they operate as wholesale
houses. Many of the cooperatives sell through federated
sales agencies. Butter made by city milk dealers is
often sold direct to the consumers from their wagons.
Cost of marketing butter. — The cost of marketing
butter is relatively smaller than the cost of marketing
most farm products. It is a staple product in regular
demand and it can be stored to prevent spoilage. For
these reasons, dealers can handle it on narrow margins.
Transportation costs, likewise, take a relatively small
part of its value. The farmer receives about two-thirds
of the retail price paid by the consumer.
r'In 1929 creameries sold their butter as follows- to wholesalers, 39.6
per cent; to manufacturers' branch houses and federated sales agencies,
22.5 per cent; to retailers, 22.8 per cent; to consumers, 10.2 per cent;
to restaurants, hotels, etc., 2.6 per cent; and to manufacturers' retail
stores, 2.3 per cent.
312 Marketing Dairy Products
Chapter 17
Review Questions
1. What characteristics of dairy products affect the
methods used in marketing them?
2. To what extent are the following products adapted to
storage: fresh milk? condensed milk? powdered milk? butter?
3. Where are the principal producing areas in the United
States for milk? butter?
4. What can you say of the demand for milk? For butter?
How is the demand affected by changes in price?
5. How is milk transported to market?
6. What is the trade channel for milk?
7. What types of cooperative associations are engaged in
marketing fluid milk?
8. How does the bargaining association operate? What
marketing functions does it perform?
9. What functions do operating associations perform?
10. Describe the classification plan.
11. Describe the base-surplus plan.
12. What is the object of these plans? Have they been
successful in attaining their objective?
13. What is meant by saying that milk has a "controlled
price"?
14. How do the producers attempt to secure monopoly
prices?
15. How are the consumers' interests guarded in the pur-
chase of milk?
16. What can you say of the cost of marketing milk?
What factors contribute to a high cost? What factors con-
tribute to a low cost?
17. Why does it cost more to market milk in a large city
than in a small city?
Marketing Dairy Products 313
18. What are the two kinds of butter? What are the two
types of creameries?
19. Where are most of the creameries located?
20. How do centralizers obtain their cream?
21. How is butter marketed?
22. How do you explain the relatively low cost of marketing
butter?
Thought Problems
1. The Sunny Valley Milk Producers Association employs
a base-surplus plan. Each farmer names the amount of milk
he will deliver daily during the life of his contract. For this
amount he receives the fluid milk price. For all milk over
this quantity he receives a price based on the Chicago price
of 92 score butter. If he delivers less than the stipulated
amount, he receives the base price for the amount delivered
less a deduction equal to the amount of shortage multiplied
by the difference between the base price and the price of
milk for manufacture.
George Jones agrees to deliver 100 pounds of milk a day,
or 3,000 pounds a month. During the following June, the
base price of milk is $2.50 per 100 pounds and the surplus
price is $1 per 100 pounds. During this month, Jones delivers
5,000 pounds. How much will he receive for his June de-
liveries? What is his average price per 100 pounds during
June?
2. The milk producers at Empire City operate under a
base-surplus plan. The basic quantity is the average amount
delivered during October, November, and December. This
price is $3 per 100 pounds. For a surplus over this amount
equal to 50 per cent of the basic quantity, the farmer is
paid a lower price based on sale as cream. This price is
$2 per 100 pounds. For the "second" surplus over this
amount, the farmer is paid a lower price based on the use of
the milk for manufacturing purposes. This price is $1.25 per
100 pounds.
314 Marketing Dairy Products
William Brown delivers an average of 4,000 pounds monthly
during October, November, and December. During February,
he delivers 4,500 pounds and during May he delivers 7,000
pounds.
How much does he receive for his milk in February? In
May? What is the average price in each month?
CHAPTER 18
Marketing Cotton
Consumption. — Cotton has supplied a large part of the
clothing for the world's population since the introduction
of the' cotton gin. The short fibers (linters) removed
from the seeds are used as a raw material for making
rayon and other cellulose products; cotton seed is used
for making cooking fats and oils; and the meal which
is left is used for feeding livestock. Other products of
the fiber include tires, bags, rope, twine, tents, and awn-
ings. In the United States the demand for cotton for
clothing is affected by two factors: first, we wear less
clothing than a generation ago, because of better heated
buildings ; second, silk and rayon have come into general
use, especially in women's clothing.
Cotton is grown entirely for the market, the farmer
consuming none on the farm. Cotton is our most im-
portant commercial farm crop. More than one-half of
the crop was exported before the recent depression and
the curtailment of production by the Agricultural Ad-
justment Administration.
The cotton mills that spin the cotton into thread are
the first consumers. Most of the American mills are
located in the Piedmont sections of North Carolina,
South Carolina, Virginia, and Georgia, and in southern
New England. The southern mills consume more cotton
than the northern mills. Foreign mills are located prin-
cipally in western Europe, Japan, and India, although
some other countries have important mills.
315
316 Marketing Cotton
Demand. — The demand for clothing is fairly steady.
People may economize and wear their old clothes in
times of depression and unemployment; yet in such
times the desire for economy may also cause them to buy
cotton garments rather than ones made of more ex-
pensive materials.
Production. — The United States is the largest producer
of cotton, growing about one-half of the world's crop.
In 1930-31 we produced 54 per cent of the world's crop,
while in 1934-35, under the curtailment program of the
Agricultural Adjustment Administration, we produced
only 42 per cent. The increase in price resulting from
our curtailed production increased production abroad.
In the first two years of the AAA's activity, our annual
crop declined over four million bales, while the produc-
tion in other countries increased over one million bales;
our acreage was reduced from around 40,000,000 to under
30,000,000. Other producing countries are India, China,
Egypt, Asiatic Russia, Brazil, Mexico, and Peru. The
Cotton Belt in the United States extends from Norfolk,
Virginia, southwest to Texas and Oklahoma, and north-
ward in the Mississippi Valley to the mouth of the Ohio
River. Smaller belts are found in New Mexico, Ari-
zona, and California. The annual crop in the United
States varied from 9 to 18 million bales and averaged
about 15,000,000 bales prior to the curtailment under
the Agricultural Adjustment program.
Cotton has always been grown on a relatively small
scale because of the large amount of hand labor required
to pick the lint from the stalks. Cotton production has
recently spread into western Texas, however, where it is
planted and cultivated with machines; and much of it
is picked by snapping the bolls from the stalks with
gloved hands, by pulling them off by sleds with wooden
Marketing Cotton 317
strips nailed close together on the front, or by picking
machines which are beginning to be used. Modern gins
can separate the lint from the hulls, leaves, and trash,
which are gathered by snapping and sledding, although
the lint may be of poorer grade than when picked by
hand.
Financing the growers. — Cotton is the main money
crop in many portions of the Cotton Belt. If the crop
is large or the price high, the growers may be prosper-
ous, while if the crop is poor or the price low, "hard
times" result.
Many of the farmers, especially the colored tenants,
must be financed during the growing season. Local
storekeepers and banks often loan money on the secu-
rity of the cotton crop. From one-third to one-half of
the value of the crop is often advanced to the growers
during the growing season. The local merchant often
advances food and other necessities needed by the family
during the growing season and takes a lien on the crop.
When the crop is harvested, it is delivered to the mer-
chant to pay the debt, any surplus being paid for in
cash. Under this system the local merchants are im-
portant in the marketing of cotton. The large planters
are often financed by the banks or by cotton factors,
who are described in a later paragraph.
The government-owned intermediate-credit banks
make loans to cooperative associations and also discount
farmers' notes. In this way they help to finance the
growing and marketing of cotton and other crops.
Kinds of cotton. — There are three kinds of cotton:
Upland, Egyptian, and Sea Island. Upland cotton is
divided according to the length of the fibers into short
staple, having fibers from % to 1 inch long, and long
staple, having fibers from 1 to iy2 inches long. Most
318 Marketing Cotton
of the American crop is less than one inch in length.1
The grading of cotton is known in the trade as "class-
ing" and is done from samples taken from the bales.
Cotton bought from the farms varies widely in quality.
The mills want cotton of uniform quality, which means
that cotton must be graded and arranged in even run-
ning lots somewhere between the farm and the mill.
Price. — The price of cotton depends upon the supply,
the general level of prices, and the demand. The de-
mand is fairly steady. The United States is the greatest
producer of cotton, so a relationship can ordinarily be
found between the supply in the United States and the
price. The supply depends upon the size of the grow-
ing crop and the carry-over from past years. According
to a government estimate, a crop of 12,000,000 bales
would have (at the 1926-27 price level) a price of 30
cents a pound, or a total value of $1,700,000,000; while
a crop of 18,000,000 bales would be worth only 15 cents
a pound, or $1,300,000,000.
Country marketing of cotton. — The farmers sell their
cotton to local storekeepers, to interior or local cotton
buyers, to the road buyers of cotton merchants, to mills,
to gins, through factors, and through cooperative asso-
ciations. Before it is ready for the market, the cotton
must be ginned.2
1The quality of cotton depends upon the length of the fiber, color,
foreign matter, and its spinning properties. The United States De-
partment of Agriculture divides cotton into 17 lengths and into 7
colors: white, yellow tinged, yellow stained, blue stained, spotted, light
stained, and gray. Nine grades of upland cotton are established from
No. 1 to No. 9. Each grade also has a name. No. 1, for example, is
known as Middling Fair, No. 2 as Strict Good Middling, No. 3 as Good
Middling, No. 4 as Strict Middling, No. 5 as Middling, and so on.
Linters are the short fibers removed from the seeds.
2 Ginning is, strictly speaking, a part of production, but it is com-
monly considered a part of marketing, since the farmer thinks of his
cotton as ready for the market as soon as it is picked.
Marketing Cotton
319
The cotton gin. — The cotton gin separates the seed
from the lint, cleans the lint to some extent, and places
the lint in bales. About two-thirds of the weight of the
cotton as picked consists of seeds and about one-third
of lint. The gin operator ordinarily buys the cotton
seed from the farmer and supplies the bagging and bands
Fig. 28. — A cotton gin. Wagons are bringing in seed cotton, and
a number of bales of ginned cotton are waiting for the owners.
used in baling the cotton. Present gins cost so much
that few growers own their own gins, and most of the
gins are operated on a custom basis, the operators charg-
ing by the hundred pounds for ginning the cotton. The
farmers bring the loose cotton to the gin in wagons or
trucks. The cotton leaves the gin in bales, which com-
monly have a density of 12% pounds per cubic foot and
which contain 478 pounds of cotton and 22 pounds of
bagging and ties (steel bands). Cotton for export or
storage is often compressed into bales with a density of
24 to 35 pounds per cubic foot.
320 Marketing Cotton
Country buyers. — The most numerous country buyers
are the storekeepers and the interior buyers. The local
storekeepers take cotton in payment for goods which
they have sold to the farmers on credit, and they also
buy cotton for cash. The interior buyers are local dealers
in cotton.
There are many grades of cotton, yet the local buyers
often pay the same ("hog round") price for all cotton
grown in their communities. This penalizes the farmer
with a good grade and does not encourage the farmers
to raise a good quality of cotton. The local buyers usu-
ally sell their cotton to road buyers of cotton merchants,
or through cotton factors in the primary markets.
Farmers living near cotton mills at times sell some of
their cotton to the mills, delivering the bales on the mill
platforms. The gins buy some cotton from the farmers.
This is especially true in Oklahoma.
Factors. — A factor is a commission merchant. He re-
ceives cotton on consignment from cotton planters and
local buyers, and sells it on a commission basis for the
account of the owner. The factor receives and inspects
the cotton and places it in a warehouse. It is kept in
storage until the owner orders it sold, but the owner often
follows the advice of the factor as to the best time to sell.
The cotton is sold by samples to merchants, mills,
and exporters. When the cotton is sold, the factor re-
mits the amount due to the owner with an "account
sales" showing the price received and deductions for
freight, storage, interest, and commission. The factors
in one town charge a commission of 21/*> per cent of the
price received, and in another town, $1.25 a bale.
The advantages of selling through a factor are: sell-
ing in a large market, securing the services of an experi-
enced salesman, obtaining the advice of the factor as to
Marketing Cotton 321
the best time to sell, and securing financial assistance.
The factor advances a considerable portion of the value
of the cotton when it is received, and the owner may
hold it for an advance in price if he feels the price to be
too low at the time of shipment. The factor may also
make advances during the growing season to reliable
planters. On the other hand, the factors have at times
been criticized for some of their charges. Some people
also question the need of a factor between the local
buyer and the cotton merchant.
Cotton merchants. — Cotton merchants are wholesale
dealers who buy from local buyers, large planters, factors,
and others, and who sell to cotton mills or to dealers.
The cotton merchants send their buyers on the road, and
they usually buy in lots of 100 bales or more, but occa-
sionally they buy smaller lots, at times buying a single
bale from a farmer.
The mills want to buy cotton in lots of 50 or more
bales of uniform quality. This necessitates a grading or
rearrangement of cotton between the local buyer and
the mill; therefore the cotton is often concentrated by
the merchants in primary markets, where it is graded
and shipped to the mills in even running lots.
Most of the cotton is sold by the farmers in the fall
and early winter, while the mills consume it more or less
evenly throughout the year. Cotton must therefore be
stored — a function often performed by the cotton mer-
chant. To shift the risk of a price decline while in
storage, the cotton may be hedged — sold for future de-
livery on the cotton exchange. The important functions
of the cotton merchant are buying, assembling, grading,
storing, risking, financing, and selling.
Cooperative marketing associations. — The coopera-
tive marketing of cotton has had considerable growth,
322 Marketing Cotton
and, at present, approximately 250 associations market
about 15 per cent of the crop. The more important as-
sociations are of the centralized commodity type: the
farmer joins the central organization and signs a contract
for the association to market his cotton. The objectives
of cooperative marketing are to improve the methods
of producing and marketing cotton, and to secure higher
prices for the farmers by reducing marketing expenses
and by orderly marketing.
Reducing marketing expenses. — Cooperative associa-
tions attempt to reduce marketing expenses by reducing
the number of middlemen who handle the cotton; by
lessening damage to the cotton at country points from
exposure to the weather and other causes; by re-
ducing the costs of storage and insurance; by reducing
the expenses of grading; by reducing the expenses of
financing ; and by reducing the costs of selling.
The cooperative association ordinarily sells to the mills
or to the dealers who sell to the mills; local buyers, fac-
tors, and merchants are largely eliminated. Storing in
better warehouses lessens damage and lowers the cost
of insurance. For example, one association had been
storing cotton in grade A, B, C, and D warehouses and
paying an average insurance rate of $1.51 per $100. By
storing in warehouses operating under the United States
Warehouse Act and classed as AAA, the insurance rate
was reduced to 16.2 cents. One association saved $280^
000 per year on insurance alone. The cooperative as-
sociation samples a bale only once, and it is handled and
sold on the basis of the grading thus established. Under
the method of private sales, however, the cotton is usually
sampled each time it is sold. The associations also save
the samples and sweepings, and in one year ten associa-
tions realized $169,000 from their sale. The associations
Marketing Cotton 323
save on capital costs by arranging for loans at low in-
terest rates, and they attempt to reduce selling costs
by selling in large quantities.
Orderly marketing. — The cooperative associations do
not control enough cotton to enable them to stabilize
prices throughout the year. They do, however, study
statistics, store their cotton, and attempt to sell it at
times when the price is favorable.
Pooling. — Most of the associations pool the cotton sold
for the farmers. Thus the farmer's cotton is placed in
a pool with other cotton of the same quality, and he is
paid the average price received for all cotton in the pool.
If he has 10 bales of middling fair white % inch, and 5
bales of strict good middling white 1 inch, both lots are
placed in the pools with other cotton of the same qual-
ity. The farmer receives for his ten bales the average
price received by the association for all of its middling
fair white % inch in the pool; and for his five bales, the
average price received by the association for all of the
good middling white 1 inch in the pool. The farmer is
not penalized for selling at a time when the price is low;
neither can he profit by selling when the price is high.
Some farmers who study the market closely feel that
they can determine the best time to sell. They may
object to receiving only the average price during the
season when they feel that they could select a better-
than-average time to sell. To meet the demand of such
growers some associations operate pools for shorter pe-
riods, as for one day, one week, or one month. Such
pools allow the growers to specify when their cotton is
to be sold.
Purchase of cotton by the mills. — The southern mills
buy most of their cotton from cotton merchants and
cooperative associations. The New England mills buy
324 Marketing Cotton
largely from dealers or brokers, who buy from or sell
for the cotton merchants and cooperative associations.
Most of the cotton is shipped from southern warehouses
direct to the mills.
The mills buy much of their cotton to fill orders which
they have received for cloth. When they think the price
is low or when they are offered cotton of a desired qual-
ity, they may buy when no order for cloth has been re-
ceived. They can protect themselves against a drop
in price by hedging, or they can trust their judgment
to buy when prices are low and make a profit out of a
rise in price. In the latter case, they suffer a loss if the
price drops.
Chapter 18
Review Questions
1. What are the uses of cotton? What are its chief
competitors?
2. For what are linters used?
3. What are the uses of cotton seed?
4. What can you say of the elasticity of the demand for
cotton?
5. Where is cotton grown in the world? In the United
States?
6. Why has cotton raising been a small-scale industry in
the past?
7. How are the growers financed?
8. What are the different kinds of cotton?
9. How is cotton graded?
10. Who are the chief consumers of cotton?
11. What determines the price of cotton?
12. How are cotton gin operators paid for their services?
Marketing Cotton 325
13. To whom do the farmers sell their cotton?
14. How does the local storekeeper operate in the marketing
of cotton?
15. What is a factor? What services does the factor per-
form in the marketing of cotton?
16. Who are the cotton merchants? What is their place
in the trade channel?
17. What functions do the cotton merchants perform?
18. How do the cooperative associations operate in the
marketing of cotton?
19. What are the objectives of cooperative associations?
20. How do cooperatives attempt to reduce marketing
costs?
21. How do cooperatives pool cotton?
22. Why do some growers dislike to pool their cotton?
23. How do cooperative associations reduce insurance costs?
24. How do the mills buy their cotton?
25. Why do some mills speculate in cotton? How do other
mills avoid speculating in cotton?
Thought Problems
1. Who are the final consumers of cotton? Can the con-
sumption of cotton be increased? If so, how? If not, why?
Would it be socially desirable to have the consumption of
cotton increased?
2. The one-crop system has been said to be the curse of
the Cotton Belt. Diversification of crops is advocated as
the remedy. How would diversification help the cotton
farmers?
3. Cooperative associations are said to benefit the farmers.
Why have they not had a greater growth in the marketing
of cotton?
4. What is meant by orderly marketing? How has it
326 Marketing Cotton
been applied by the cotton cooperatives? How could it be
applied?
5. If cooperative associations controlled the marketing of
the great bulk of the cotton crop in the United States, could
they adopt an orderly marketing program and stabilize
prices? If so, would this be advantageous to the growers?
To the consumers?
6. If such an orderly marketing program were successful,
would there be any need for the cotton exchanges?
CHAPTER 19
Prices, Mark -Dps, and Margins
Importance of selling prices. — The merchant's profit
is the difference between his selling price and the cost of
the goods to him plus the expenses of operating his busi-
ness. If his prices are too low, they will not cover the
cost of goods and his expenses. If they are too high,
his sales will decline.
Factors affecting prices. — In pricing his goods, the
merchant should consider the cost of the goods, the ex-
penses of selling them, the prices the consumers will
pay for the goods, and the prices charged by his com-
petitors.
If a merchant sells goods for less than their cost to
him plus his operating expenses, he will lose money.
When competition will not permit him to raise his prices,
he may be able to prevent a loss by buying goods at
lower prices or by reducing his expenses. When under-
sold by chain stores, many dealers started buying from
cash-carry wholesalers or joined cooperative chains in
order to secure lower prices. Buying for cash or buying
in larger quantities may enable the buyer to secure
lower prices. A dealer can often reduce his expenses by
increasing his efficiency of operation, the methods of
doing which are discussed in the following chapters.
If a merchant places too high a price on his goods, his
sales will decrease. On the other hand, low prices
ordinarily increase sales. For luxuries or specialties, peo-
327
328 Prices, Mark-Ups, and Margins
pie may be willing to spend liberally; for standard ne-
cessities, on the other hand, they are likely to buy from
the seller with the lowest price. For goods which are
not standardized, the buyers may think that a high
price is a sign of quality; similarly, they may hesitate to
buy a low priced article for fear it is of inferior quality.
Goods of known quality, however, are likely to be bought
from the lowest priced seller who is convenient to the
buyer. When articles are bought for display or show,
people like to purchase goods that are known to be ex-
pensive or which bear the label of an exclusive manu-
facturer or dealer.
Customary prices. — Goods that are sold at the same
prices for a long time come to have customary prices,
that is, people associate certain prices with them. For
many years, street car fares were five cents, and people
objected very strenuously when higher operating costs
forced the companies to raise their fares. Some articles
have been sold for 5, 10, or 25 cents for so long that the
buyers think of them as being worth only these amounts.
When an article has a customary price, it is desirable to
sell it at that price. It may be better to change the size
of the package rather than the price.
Odd and even prices. — -Goods are often given even
prices so that only one coin is necessary to make a pur-
chase. We thus have prices of 5, 10, 25, and 50 cents,
and one dollar. Many stores, however, use odd prices,
such as 9, 19, 21, 39, 47, 89, and 98 cents. Such prices
often place an article in a lower price class ; for example,
98(5 for a dollar item places the article in the class of
articles selling for less than a dollar. Odd prices suggest
cut prices. A nineteen cent price suggests that the article
ordinarily sells for twenty-five cents. A forty-seven
cent price leads the customer to feel that the article
Prices, Mark-Ups, and Margins 329
usually sells for fifty cents.1 Department stores, chain
stores, mail-order houses, and many independent mer-
chants have often used odd prices very effectively. Odd
prices are so generally used for some articles that it may
be said that the odd prices have become the customary
prices.
Odd prices may also suggest that the selling prices
are arrived at accurately and not in a haphazard man-
ner. Thus butter, eggs, and many other grocery items
are commonly priced in odd cents.
Quantity prices. — The seller often gives a lower price
on the sale of a large quantity than on the sale of a small
quantity. The manufacturer may give a lower price on
a carlot sale than on the sale of a single case, and the
buyer who purchases $50,000 a year may obtain a lower
price than if he bought only $1,000.
The retailer may use quantity prices to increase the
size of his sales: a 10 ceijt article may be priced at $1
a dozen. The use of quantity prices may increase the
average size of sales, even though there is no reduction
in prices. Thus, instead of marking his goods at five
cents each, the retailer may mark them at 10 for 50
cents, thus suggesting a purchase of 10 units. Some
retailers have been successful in selling oranges by the
bushel and peck; bushel and peck prices suggest the
purchase of these lots to obtain lower prices.
Leaders. — Stores often place very low prices on certain
articles which are used as leaders. At times leaders are
sold below cost; they are then known as loss leaders.
Leaders are used to attract customers to a store, in the
1 Another^ reason for odd prices is that the customers do not ordina-
rily present the correct change. The salesperson must then ring up
the snle on the cash register or make out a sales slip in order to make
change. This lessens the opportunity for dishonesty by the salesperson.
330 Prices, Mark-Ups, and Margins
hope that they will buy other goods on which the dealer
makes a profit. Leaders have been used very success-
fully by department, chain, and many independent
stores. Goods used as leaders are usually widely used
staple goods of known quality, such as overalls, adver-
tised toilet articles, sugar, flour, soap, canned goods,
butter, and potatoes.
Theory of using leaders. — The theory of using leaders
is to sell well-known or standard goods at low prices
and make a profit on other goods that will bear a larger
mark-up. It is said that the public know the quality
of only a few goods and that they compare prices on
relatively few articles. For this reason, it is argued that
by naming low prices on a few articles, the dealer can
attract customers and then make a nice profit on the
rest of his goods.
Many people feel that every item should carry a
mark-up large enough to cover its cost and the expense
of selling. It seems unfair to overcharge the buyers of
some articles to make up for losses on articles sold to
other customers. It would seem that every article should
carry a profit, yet competition may prevent the merchant
from pricing all of his goods to do so. Although the
practice appears unfair, it must be admitted that some
sellers have used low priced leaders very successfully in
building up sales and making profits.
The one-price policy. — A one-price policy means that
the seller has the same selling prices to all buyers.
Historically this is a relatively new policy. Formerly
merchants commonly marked their goods in code, and
haggling over prices was common. The dealer would
ask a higher price than he expected to receive, and the
buyer would offer a considerably lower price. A battle
Prices, Mark-Ups, and Margins 331
of wits, words, and endurance followed, and the price
finally paid depended largely on the relative bargaining
ability and perseverance of the buyer and seller. Such
"horse trading" tactics were common in the sale of all
commodities, and many buyers and sellers prided them-
selves upon their shrewdness in trading. The practice
of higgling over prices is still common in many parts
of the world. In the Orient, for example, a seller often
asks several times the amount he is willing to accept for
his goods.
The one-price policy was popularized in the United
States by such great merchants as A. T. Stewart in New
York, John Wanamaker in Philadelphia, and Marshall
Field in Chicago during the middle portion of the last
century. Its spread was somewhat slow, but most re-
tail stores now use it. Yet cutting prices on the larger
commodities is still common, and higgling over prices is
still common, especially in the wholesale markets. Hig-
gling over prices is expensive, as it takes the time of
both buyer and seller. When accustomed to uniform
prices, the buyer may become suspicious of a cut-price
article, feeling that its quality is poor.
Determining selling prices.— When the dealer receives
goods, he ordinarily adds enough to their cost to cover
his operating expenses and leave a profit. What the
buyers will pay for the articles and the prices charged
by competitors, however, often modify the figures ar-
rived at in this way. On some articles, the selling price
may allow a large profit; on other articles, the dealer
may have to take a loss. The amount added to the cost
of an article to secure the selling price is known as
mark-up. The difference between the price actually re-
332 Prices, Mark-Ups, and Margins
ceived for an article when it is sold and its cost is known
as margin, gross margin, or gross trading profit.
Mark-up. — The merchant adds a certain percentage of
mark-up to the cost of goods in order to arrive at a sell-
ing price. This percentage should be computed on the
selling price. To illustrate, a merchant buys an article
for 36 cents. He has operating expenses of 20 per cent,
and wants to make a 5 per cent profit; he, therefore,
wants to mark his goods with a selling price that will
yield a 25 per cent mark-up. If, erroneously, he figures
the mark-up on the cost, he takes 25 per cent of 36
cents, which is 9 cents, and adds this 9 to the 36, which
gives him a selling price of 45 cents. But his operating
expenses are 20 per cent. Figuring twenty per cent of
the selling price of 45 cents, we have 9 cents — the figure
that the merchant had intended to cover both 20 per
cent operating expense and 5 per cent profit. His
mark-up, however, merely covers his operating expenses
and leaves him no profit. Many dealers make this mis-
take and then wonder why they have no profit.
The correct method of figuring mark-up. — The correct
method is to set the price so that a 25 per cent margin
is realized on the selling price. To do this, we let the
selling price equal 100 per cent. We want a 25 per cent
margin, so we subtract 25 from 100; this leaves 75 per
cent, which equals the cost of the article. Now if 75
per cent is equal to 36 cents, then 100 per cent is equal
to 48 cents, the correct selling price. The difference be-
tween 48 cents (the selling price) and 36 cents (the
cost) is 12 cents. Twelve cents is 25 per cent of the sell-
ing price, and it covers the 20 per cent expenses and
allows a 5 per cent profit.
The rule is to deduct the desired percentage of
Prices, Mark-Ups, and Margins 333
mark-up from 100; divide the cost of the goods by the
remainder; and multiply the quotient by 100.2 Thus:
Per Cent
Selling price 100
Desired percentage of mark-up 25
Cost of the article 75
75 per cent =36 cents; 1 per cent =0.48 cents;
100 per cent =48 cents, the selling price.
Short cuts, of course, are used. To secure a 50 per
cent mark-up, divide the cost by 5 and move the decimal
point one place to the right; to secure a 40 per cent
mark-up, divide the cost by 6 and move the decimal one
place to the right; to secure a 30 per cent mark-up, di-
vide by 7 and move the decimal point; to secure a 25
per cent mark-up, divide by 7.5 and move the decimal
point; to secure a 20 per cent mark-up, divide by 8 and
move the decimal point; to secure a 33 % per cent
mark-up, divide the cost by 2 and multiply by 3. Tables
are prepared which show the selling price of articles with
different costs to yield various percentages of mark-up.
Such tables enable dealers to mark their goods correctly
without the work of computing the price of each article.
What is cost? — Cost is the price paid for an article,
plus the expense of getting it to the merchant's place of
business. The cost includes the payments for freight,
express, postage, drayage, and any costs of loading, un-
loading, and packing paid for by the buyer.
2 Twenty-five years ago, many arguments were made for computing
mark-up on cost. Research bureaus, government departments, trade as-
sociations, and universities, however, practically all agree that mark-up
should be computed on selling price. Expenses included in salesman's
commissions are nearly always figured on sales. To compute expenses
on selling prices and mark-up on cost prices is likely to be not only
misleading but disastrous to the dealer's profit.
334 Prices, Mark-Ups, and Margins
To secure at the cost price, all trade discounts3 are
deducted from list price. Quantity discounts are also
usually deducted when they are given at the time of pur-
chase. Sometimes quantity discounts are based on the
total purchases made during a given period, such as a
month or a season. When this is the case, the exact
amount of the discount is not known at the time the
goods are received and placed on sale.
There is a difference of opinion as to whether cash
discounts should be deducted in arriving at the cost of
the goods. A cash discount is an allowance for paying
a bill within a certain time. Cash discounts are com-
monly allowed on purchases made at wholesale but are
not usually allowed on retail sales to the consumers. A
common rate of discount is 2 per cent for payment within
10 days of date of sale (invoice), the bill being due at
its face amount in 30 days. These terms are usually
expressed thus: 2/10, n/30. If a merchant buys $100
worth of goods on these terms on January 1 and pays
for them on January 10, he pays only $98. If he does
not pay on or before January 10, he is not entitled to
any discount. The bill is due at its face value of $100
on January 30.4 The extra $2 is in the nature of a
penalty for slow payment.
3 Trade discounts are deductions from list prices. They are sub-
tracted from the list price one at a time so that the buyer is never
charged with them. The list price may be the price to the ultimate
consumer, while a trade discount is given the retailer for his margin.
4 Some common terms are: 2/10, n/30; 1/10, n/30; 2/10, n/60; 2/10,
1/30, n/60; V2/10, n/30; and 2/10, n/30 e.o.m. E.o.m. means "end of
month." In some trades the dealers make so many small purchases
that the rendering of separate bills and the making of separate collec-
tions on each purchase would involve much work for both seller and
buyer. Hence it is common, in such trades, to invoice all purchases
made during the period at the end of the period. An invoice is ren-
dered at the end of the period and the terms apply from that date.
Thus under terms of 2/10, n/30 e.o.m., the buyer is allowed to take
Prices, Mark-Ups, and Margins 335
Mark-downs. — Goods are not always sold at the
marked price. When goods do not sell within a reason-
able time, the dealer may change their location in the
store, may give them a more prominent display, may
place them in the show windows, may advertise them in
the newspapers, may instruct the salespeople to use
special effort to sell them, or he may reduce their prices.
Some stores have a definite policy of reducing the prices
of all articles that do not sell within a certain period
after they are placed in stock.
Goods may also be marked down because they become
soiled or shelf worn, because they are going out of fash-
ion, because competitors reduce their prices, because
market prices decline, or because the dealer is over-
stocked.
Margin. — The margin actually realized on the sale of
goods is ordinarily less than the mark-up placed on them.
Some goods are marked down; some are stolen; others
decay or spoil, so that they are a complete loss. Such
mark-downs and losses reduce the margin.
Determining the mark-up percentage. — All of these
factors must be taken into consideration in determining
the mark-up that should be placed on goods. The
mark-up percentage varies with the goods. The cost
2 per cent discount on the month's purchases if he pays the bill by
the 10th of the following month. The period may be a week or one-
half of a month. Wholesale grocers and druggists often use half-months
or months as the accounting period for sending out bills. Retail
stores often send statements weekly or monthly, covering purchases
made during the week or month. Many other terms are used. In
some cases terms apply from the season in which the goods are to be
sold. In the apparel trades, manufacturers like to obtain advance
orders to keep their plants in operation. Thus on spring orders, the
manufacturer may make and ship the goods in the late winter, but the
invoice may be dated on April 1 or May 1, from which date the terms
apply. The retailers may be allowed from 60 or 90 days from the date
of the invoice to make payment.
336 Prices, Mark-Ups, and Margins
of selling groceries is less than the cost of selling cloth-
ing; groceries are therefore given a lower mark-up than
clothing. The mark-up placed on different articles by
the same dealer often varies widely. Some items have
a very slow turnover, which means a higher expense; it
is natural, therefore, to place a higher mark-up on such
goods. Goods used as leaders may have a low mark-up.
Goods that are not highly competitive are likely to bear
a larger mark-up than those which are highly competi-
tive. Specialties often bear a higher mark-up than
staples. Nails, sugar, and overalls are examples of com-
petitive staple articles that are commonly given very
low mark-ups by the retailers.
Mark-downs are more important with style goods
than with staples. Goods with a high style risk are
usually given a high mark-up to allow for the mark-
downs of those that do not sell promptly.
The merchant giving credit and delivery service usu-
ually has higher expenses than the merchant selling on
a cash-carry basis and may therefore mark his goods for
a higher margin. Dealers in goods sold on long credit,
such as farm equipment, furniture, and musical instru-
ments, may have two prices on their goods, one for
credit and one for cash. At times they mark their goods
on a credit basis and give a lower price for cash ; at other
times, they mark their goods for cash and charge extra
for credit. This latter practice is common in the sale of
automobiles and trucks when credit is extended by fi-
nance companies.
Dealers in large cities usually have higher expenses
than dealers in the smaller towns, and hence use a higher
percentage in marking their goods.
The dealer's total margin. — The dealer's total margin
is the sum of the margins made on all articles sold. It
Prices, Mark-Ups, and Margins 337
is the difference between sales and the cost of goods sold.
The cost of goods sold is determined by adding purchases
and opening inventory and by deducting the closing in-
ventory. Margin is computed as follows:
Sales for the period $40,000
Inventory at the beginning of period. $10,000
Purchases 30,000
Transportation (freight, express,
postage, drayage) 500
Total to be accounted for. . . $40,500
Inventory at the close of the period . . 10,500
Cost of goods sold 30,000
Margin $10,000
The margin here is $10,000, or 25 per cent of sales.
Effect of mark-downs. — A dealer buys 1,000 pairs of
shoes for $3.00 a pair, or a total of $3,000. In order to
make a 40 per cent mark-up, he prices them at $5.00.
He sells 700 pairs at $5.00 and receives $3,500. Before
he sells the other 300 pairs, the manufacturer reduces
his price to $2.40, and a competitor offers his shoes at
$4.00. The dealer therefore reduces the price on the
other 300 pairs to $4.00. He sells 200 pairs at this price
and receives $800. The other 100 pairs do not sell at
this price, and he therefore advertises them in a clear-
ance sale for $2.00. He realizes $200 for them at this
price. His total margin on the 1,000 pairs of shoes is
$1,500.
Sales:
700 pairs sold at $5.00 $3,500
200 pairs sold at $4.00 800
100 pairs sold at $2.00 200
Total. ... $4,500
Cost of goods sold, 1,000 pairs at $3.00 . 3W®_
Margin $1^500
The dealer's total margin of $1,500 on the 1,000 pairs
of shoes was 33% per cent. He priced them for a 40
338 Prices, Mark-Ups, and Margins
per cent margin, but mark-downs reduced his margin to
33% per cent.
Replacement costs. — There has been considerable dis-
cussion of whether or not the dealer should change his
selling prices when the wholesale market prices of the
goods change. Dealers seldom re-price all of their goods
every time cost prices change. They leave the same prices
on the goods until it is necessary to reduce the prices to
sell them or until they buy some new stock. Some ar-
gue, however, that when the market price (the replace-
ment cost) of the goods rises, the merchant should go
over his stock and raise his prices to the figures that they
would be if he had bought at the advance price. The
advocates of this policy say that the dealer should do
this to compensate for mark-downs which he must take
when prices fall.
In the illustration given above, the shoe dealer marked
down the price on 300 pairs of shoes because the manu-
facturer's price was reduced. Suppose the manufacturer
raises his price to $3.60. Now if the dealer followed the
policy of changing his prices on the basis of replacement
costs, he would have marked up the price of the shoes to
$6.00. If he had sold 200 pairs at this price, he would
have increased his margin by $200. This would have
been a clear profit to him, arising out of changes in mar-
ket prices over which he had no control.
In periods of rising prices, dealers make profits in just
this way — out of increased values of inventories. On
the other hand, when prices fall, dealers must often take
losses on their inventories. This helps explain why pe-
riods of rising prices are profitable and periods of falling
prices unprofitable to merchants.5
5 It must not be inferred from this that all or even the majority of
dealers make a practice of remarking their goods every time prices
change. The shoe dealer in the above illustration probably would not
Prices, Mark-tips, and Margins 339
Variation in margins. — The margins realized by dif-
ferent dealers vary widely. The margins of a group of
238 rural dealers varied as shown in Table 26:
TABLE 26.— VARIATIONS IN MARGINS OF A GROUP OF
RURAL STORES HANDLING FARM EQUIPMENT
Percentage of Number of
Margin Dealers
Under 10 12
10-12 16
13-15 28
16-18 56
19-21 57
22-24 38
25-27 18
28-30 9
Over 30 4
238
Average margins. — Average margins realized by
groups of different kinds of stores are given in Table 27
from figures in typical surveys:
TABLE 27.— AVERAGE MARGINS FOR VARIOUS
KINDS OF STORES
Retail stores: Per Cent
Grocery (service) 19.0
Hardware 26.0
Shoe 29.0
Large department 35.0
Small department . . . 32.0
Jewelry ... 40.0
Tire and auto accessory 24.0
Wholesale stores:
Grocery (service) 13.0
Drug 17.0
Automotive equipment . . . 25.0
Plumbing 22.5
Wall paper 42.5
Dry goods 18.0
Hardware 20.0
change the prices of his shoes immediately upon hearing of the manu-
facturer's change in price. He would probably leave the price un-
changed until he buys more shoes. When he places his newly purchased
shoes on sale he must change the prices on the shoes in stock or
offer the same shoe at two different prices.
340 Prices, Mark-Ups, and Margins
Chapter 19
Review Questions
1. What determines a merchant's profit?
2. What factors does a merchant consider in naming his
prices?
3. What is the danger of a high price? Of a low price?
4. What is meant by customary price? Its importance
to the seller?
5. What is meant by an even price? What is its ad-
vantage?
6. What is meant by an odd price? What is its ad-
vantage?
7. What is meant by quantity prices or discounts?
8. What is meant by a leader? By a loss leader?
9. Why are leaders used? Ts it good business to use price
leaders?
10. What is meant by mark-up?
11. What factors determine the proper percentage of
mark-up?
12. What is the correct rule for computing mark-up?
13. What is meant by the cost of goods to a dealer?
14. What is a trade discount?
15. What is a cash discount? Illustrate.
16. What is meant by a mark-down?
17. Why are goods marked down?
18. What is meant by margin? What are other names for
margin?
19. How is a dealer's margin computed?
20. How do mark-downs affect a dealer's margin?
21. What is meant by replacement cost?
Prices, Mark-Ups, and Margins 34]
22. A dealer buys shoes at $4.20 a pair. What is thi
selling price for a 40 per cent mark-up? For a 30 per cen
mark-up? For a 33% per cent mark-up? For a 50 pe
cent mark-up?
23. A dealer buys dresses at $9.00 each. What is thi
selling price for a 33% per cent mark-up? For a 50 pe
cent mark-up?
24. A dealer buys shirts at $12 a dozen. What must th<
selling price for each be to realize a 25 per cent mark-up
A 30 per cent mark-up? A 40 per cent mark-up?
25. A dealer buys lettuce (5 dozen heads to the case) a
$2.40 a case. What is the selling price per head to realizi
a 33% per cent mark-up? A 20 per cent mark-up? A 51
per cent mark-up?
26. A grocer buys sugar at 41/^ a pound. What is th<
price for a 10 per cent mark-up?
27. A grocer buys sugar at 4^ a pound and pays freigh
and dray age at the rate of 51.2^ per 100 pounds. What i
the selling price per pound for a 6 per cent mark-up?
28. A grocer buys oranges at $5.40 a crate. He pays 36<
per crate for having the oranges hauled to his store, an<
there are 216 oranges in each crate. What is the selling pric<
per dozen to realize a 33% per cent mark-up?
29. A dealer buys 100 suits at $40 less 40 per cent trad
discount. He pays $30 express charges on the suits. Wha
is the selling price of each suit for a 40 per cent mark-up?
30. Dealer Brown had an opening inventory of $4,000
He makes purchases of $40,000 and pays transportatioi
charges of $1,000 on his purchases. At the end of the year
his inventory was $3,000. During the year his sales wen
$60,000. What was his margin in dollars? In percentage?
Thought Problems
1. When is a price high? When is a price low?
2. Why are trade discounts used?
3. Why are cash discounts given? Should a cash discoun
342 Prices, Mark-Ups, and Margins
be considered as a reduction in the purchase price or as a
financial gain that should be added to profit?
4. A cash discount of 2/10, n/30 is said to be equal to
36 per cent a year. How is this 36 per cent computed? It
is said that money is not worth 36 per cent. If so, why are
such large discounts given?
5. Should a merchant make a practice of changing the
prices of goods in stock when the market prices of these
goods change, that is, should he base his prices on replacement
costs? Why or why not? Give arguments on both sides.
6. A store selling wearing apparel for women marks down
the price of all unsold goods 25 per cent at the end of two
weeks. A dress priced at $16 is marked down to $12 if
it is unsold at the end of two weeks. If unsold at the end
of four weeks, the price is reduced to $9. If unsold at the
end of six weeks, it is reduced to $6.75. This method is
continued until the dress is sold or given away. Comment on
this method of making mark-downs.
7. Another dealer in women's wear says that what a
garment costs has nothing to do with its selling price. Once
purchased, the garments must be sold for what they will
bring. He therefore gets the advice of his sales women and
marks his goods with the prices which he feels the consumers
will pay for the various garments. If the garments do not
sell at this price, they are marked down. Comment on this
method of naming prices.
8. A dealer in men's furnishings bought a bargain lot of
fancy scarfs for his Christmas trade. He priced the scarfs
at $2, a very reasonable mark-up for quick sale. At this
price, they were an exceptionally good value to the consumers.
They did not move at this price. As Christmas approached,
the dealer became worried and marked up the price to $4.
They sold quickly at this price. Under what circumstances
will a higher price increase sales?
9. Why do the margins of similar dealers vary so widely?
10. A dealer buys hats at $5 each on the following terms:
5/30, 3/60, 2/90, n/120. He pays for the hats within 30
Prices, Mark-Ups, and Margins 343
days. What is the selling price for a mark-up of 40 per cent?
11. A manufacturer offers the following quantity discounts:
1-9 cases, net; 10-49 cases, 2 per cent discount; 50-99 cases,
3 per cent discount; 100-399 cases, 4 per cent discount; 400
cases (carload), 5 per cent discount and prepaid freight.
Terms are 2/10, n/30. A dealer buys 400 cases and pays
within 10 days. A case contains 24 items. The quoted
price is $2.70 per case. What is the selling price per item
for a 25 per cent mark-up?
12. A manufacturer quotes knives at $6 a dozen with the
following discounts, 30 and 20. What is the selling price of
a knife to yield the dealer a 50 per cent mark-up?
13. In figuring mark-ups, the selling price frequently comes
out an odd figure. Many dealers mark the price at the
nearest even or customary figure. It is said that this practice
causes many small losses and cuts heavily into profit, and
that a dealer should use the exact odd prices. What is your
opinion?
14. What is meant by e. o. m. terms? Why are they used?
CHAPTER 20
Operating Expenses
Expenses. — In the operation of his business a mer-
chant is bound to incur expenses. He must pay salaries
and wages to his employees, rent for the building oc-
cupied, and taxes and insurance on his goods and fix-
tures. He must pay for advertising, light, heat, wrapping
paper and supplies, delivery of goods, telephone service,
and depreciation on his store fixtures. Bad debt losses
are also considered as an expense. The merchant or-
dinarily includes his own salary as an expense. This is
considered good practice, but the difficulty is that the
merchant is not an impartial judge of the value of his
own services.
Rent on owned buildings. — When the merchant owns
his own store building, he may charge himself rent on
the building, just as if he rented it from another. In
this case the taxes and depreciation on the building, and
interest on its value or on the mortgage must not be
included in expenses. To do so would be to include the
expenses of the building twice.
Interest. — Interest upon the owner's capital invested
in a business is sometimes included in operating ex-
penses and at other times is excluded from expenses and
considered as a part of profit.
Classification of expenses. — The expenses may be
classified in several ways. The most common method in
the past has been to classify them in the way the ac-
countant ordinarily kept the books. This has been called
344
Operating Expenses 345
the natural classification, as the expenses are grouped
according to the purpose for which they were made —
for salaries, rent, advertising, taxes, insurance, repairs,
and depreciation.
The operating classification groups expenses according
to the departments of the business or according to the
functions performed, as, for example, administration,
publicity, buying, and selling. This grouping helps the
merchant to analyze his business. Ordinary accounting
merely tells the dealer whether or not he is making
money on his total business. He is very often making
money on some departments or on some goods and losing-
money on other departments. Cost studies have shown
that many business concerns were losing money on many
of their customers, on many of their products, and in
many territories.1 In many cases a thorough analysis
of expenses has shown that the dealer was pushing the
sale of goods on which he WTRS losing money.
Form of operating statement. — A form of operating,
or profit and loss, statement is shown in Table 28 cov-
ering the operations of department stores with sales of
$600,000 (see page 346).
It will be seen from the statement that this store had
gross sales of $636,600, but that goods returned by the
customers and allowances made to customers amounted
to $36,000. This left net sales of $600,000. Net sales
are taken as 100 per cent in the computation of all per-
centages, except those of earnings or income on capital.
The cost of goods sold (purchases with inventory ad-
justments) was $396,000. This left a margin of $204,000,
or 34 per cent. Expenses, including interest, amounted
1 A third method of classifying expenses is according to productive
factors as listed by economists — land, labor, capital, and management.
Very little practical use has as yet been made of this classification.
346 Operating Expenses
TABLE 28.— FORM OF PROFIT AND LOSS, OR OPERATING,
STATEMENT COVERING DEPARTMENT STORES*
f Dollars ^ Percentages
Gross sales $636,600
Less returns and allowances 36,600
Net sales $600,000 100.0%
Inventory (goods in stock), Jan. 1 $160,000
Purchases: $373,900 plus transporta-
tion on goods of $6,600 1 380,500
Cost of goods handled $540,500
Inventory, December 31 144,500
Cost of goods sold 396,000 66.0
Margin $204,000 34.0
Operating expenses:
Salaries and wages $101,400 16.9
Rent 27,000 4.5
Advertising 15,600 2.6
Loss from bad debts 1,500 .25
Insurance on stock and fixtures. . 2,700 .45
Taxes on stock and fixtures . ... 3,600 .6
Interest on investment, excluding
building ... 13,800 2.3
Other expenses 24,000 4.0
Total, including interest 189.600 31.6
Operating or net profit $ 14,400 2.4
Other incomes f 6,600 1.1
Net income (or profit) over and above
interest on investment. 21,000 3.5
Net earnings or income, including
interest on investment. 34,800 5.8
Net earnings or income on capital. 12.3 per cent
*Figures adapted from report of Harvard Bureau of Business Research
for stores with sales between $500,000 and $2,000,000.
|Cash discounts received were deducted from purchases.
to $189,600, or 31.6 per cent. The operating profit
amounted to $14,400, or 2.4 per cent. The net income
(or profit) after adding other income was $21,000, or
3.5 per cent. In order to compute the earnings on invest-
ment, we add the interest of $13,800 included in ex-
pense. This gave $34,800, which was equal to 12.3 per
cent of the invested capital.
Operating Expenses % 347
In the above statement, cash discounts taken on pur-
chases were deducted from the purchases. If this is not
done, such discounts are included in "other income/'
and added to the operating profit to obtain the net in-
come.
Variation in expenses. — The dealer's expenses vary
with the kind of goods handled, with his location, with
the services rendered his customers, with his volume of
sales, with changes in the price level, and with his ef-
ficiency.
It costs more to sell drugs than to sell groceries, and
it costs more to sell furniture than drugs. The expenses
vary with the time and effort required to make sales,
with the size of the individual sales, with the space oc-
cupied by the goods, with the services rendered, and with
the rate of stock turnover or the length of time goods are
carried in stock before being sold. Groceries are con-
venience goods and people do not ordinarily shop for
them. This means that the salespeople do not have to
wait for the customers to make up their minds what they
want. The grocer has a relatively high rate of stock
turnover.
The drug store handles convenience goods to a very
large extent, but the druggist must carry a great variety
of goods in stock, which slows up his rate of turnover.
Goods sold at the soda fountain and in the prescription
department require personal service. For these reasons
the druggist has higher expenses than the grocer.
The furniture merchant sells in large units, but his
merchandise is bulky and requires a large amount of
space, thus increasing his expense. People shop for fur-
niture, which means that the salesmen must show furni-
ture to many people who make no purchases; this adds
348 Operating Expenses
to the selling expenses. Sales are likewise irregular,
thus necessitating periods of idle time which limit the
sales per salesman. The quantity of goods required for
a complete stock, and the seasonal nature of the busi-
ness, slow up the rate of stock turnover and increase
expenses.
Retail establishments that repair or make goods (such
as jewelry, radio, plumbing, and electric shops; garages;
and restaurants) have their expenses increased by the
extra amount of labor required.
Average expenses of wholesalers and retailers in vari-
ous trades were given in Chapters 7 and 8.
Services rendered. — The services rendered customers
affect the dealer's expense. The store extending credit
liberally and delivering its goods has higher expenses
than the store operating on a cash-carry basis, other
things being equal. The self-service store usually has
lower expenses than the store employing salesmen. The
store having expensive fixtures, rest rooms, writing
rooms, and a liberal policy in allowing goods to be re-
turned will ordinarily have higher expenses than a store
giving less service.
It has been estimated that it costs retail grocery and
hardware stores from 5 to 8 per cent for credit and de-
livery service on goods sold on that basis. The cost of
credit includes the interest on outstanding accounts; the
losses from bad debts; the labor in keeping books and
the cost of making collections — sending out statements
and collection letters; and the use of personal collectors,
lawyers, and collection agencies. Very few stores, how-
ever, do all of their business on credit, and very few
deliver all of their goods. For these reasons the cost of
credit and delivery service to most grocery and hard-
Operating Expenses 349
ware stores is less than 5 per cent when computed on
total sales.2
Operating efficiency. — Differences in the efficiency of
different merchants in 0 trade account for more of -the
variation in their expenses than any other single factor
— than the services rendered the consumers, differences
in location, volume of sales, or changes in price level.
A merchant's efficiency is shown by his selection of
goods, by the location of his store and the way he uses
the space, by the way he displays his goods, by the sales-
manship used in selling the goods, by the way he adver-
tises, and by the rapidity with which he turns over his
stock of goods.
The variation in the expenses of similar dealers is i] •
lustrated by the figures in Table 29 which cover a group
of rural merchants:
TABLE 29.— VARIATION IN EXPENSES OF A GROUP
OF RURAL STORES
Percentage of
Operating
Expense
Under 5
Number of
Dealers
8
5-7
15
8-10
39
11-13
43
14-16
50
17-18
46
20-22
14
23-25
8
Over 25
15
238
2 Figures compiled by The Progressive Grocer for successful food
stores in 1934 show the following average expenses: super-market on
service basis, 18.2 per cent; super-market on cash-carry basis, 13.8 per
cent; super-market on cash-carry self-serve basis, 12.1 per cent; service
stores, 16.7 per cent; cash-delivery stores, 17.5 per cent; cash-carry
stores, 16.4 per cent; cash-carry self-serve stores, 12.6 per cent.
350 Operating Expenses
Method of measuring efficiency. — In order to succeed,
a merchant must be at least as efficient as his competi-
tors, and to be an outstanding success he must be more
efficient than they. One method of measuring efficiency
is to place one's accomplishments alongside those of
others engaged in the same line of business. A mer-
chant's accomplishments are set forth in his operating
(or profit and loss) statement. A merchant can measure
his relative efficiency by comparing his operating state-
ment item by item with a composite statement showing
average figures for a group of similar merchants. This
method indicates which of his expenses are high, which
are average, and which are low. It will show whether
his margin is high or low and how his profit compares
with that of other dealers in the trade. Some merchants
want to be better than average. They may compare
their operations with the operations of a superior mer-
chant or with statements covering a group of superior
merchants.
John Smith as an example. — We shall illustrate the
method with the operating statement of John Smith,
who conducts a retail hardware store with sales of $75,-
000 a year in a town of 5,000 population. His statement
is compared below with statements for dealers with sales
of $60,000 to $100,000 located in towns of from 3,500 to
10,000. John Smith's operations are compared in Table
30 with both the average performance of the entire
group and the average of the merchants making a
profit.
What Smith finds. — Upon examining these statements,
Smith finds that his margin is higher than the
average of the group and also higher than that of the
better stores.
Smith's expense for rent is higher than those shown
Operating Expenses
351
TABLE 30.— OPERATING RESULTS OF RETAIL HARDWARE
STORES WITH SALES OF $60,000 TO $100,000 IN TOWNS
OF 3,500 TO 10,000*
Group
Average
Sales 100.0%
Cost of goods sold 73.9
Margin . 26.1
Expenses:
Salesmen's salaries
Total salaries ....
Rent
Delivery
Advertising . .
Loss from bad debts
Interest on borrowed money
Other expenses ....
Total . .
Operating profi^
Cash discount and interest received
Net profit, before payment of in-
terest on investment
Interest on owner's investment
Net profit, or income, above inter-
est on owner's investment
Net profit (earnings or income) per-
centage of owner's investment
Annual sales per actual salesman $1 7,346
Annual sales for all persons in the
store (average) $11,830
Percentage of sales made on credit 58^
Days credit sales on books (num-
ber of days required to collect
accounts) . 109
Number of stockturns per year . 2.3
Annual salary per salesman . $1,078
Salary of owner $2,083
Owner's investment per $10,000
sales $4,872
A verage for
Stores Mak-
ing a Profit
100.0%
73.6
27.9
79
7.7
11.7
11.4
2.7
2.5
J.4
1.3
0.9
0.9
1.1
1.1
0.6
0.5
38
3.9
22.2
"216"
3.9
6.3
1.5
1.5
5.4
7.8
2.9
2.9
2.5
11.2
4.9
16.1
$17,251
$11,770
57%
120
2.4
$1,073
$2,089
$4,859
*Figures for average and profitable stores are from reports
Retail Hardware Association.
John Smith's
Store
100.0%
70.9
29.1
10.1
15.1
4.4
1.9
1.3
0.6
0.5
4.5
"28.3
0.8
1.3
2.1
3.4
LSloss
3.7
$14,071
$9,375
51%
92
2.0
$1,355
$2,400
$5,654
of the National
for the other dealers. He has more space than he needs,
or he is paying too much rent for his building. His de-
livery and advertising expenses are high. His expenses
for loss from bad debts are below those of the other
352 Operating Expenses
dealers. Smith's total expenses are six per cent higher
than the average for the group and nearly seven per
cent above those of the better dealers. The cash dis-
counts taken on purchases and the interest received on
notes and accounts receivable are slightly below the
average. This indicates that he did not take the dis-
counts on all purchases.
After deducting interest, John Smith showed a deficit.
However, he earned 3.7 per cent on his investment, com-
pared with an average of 11.2 per cent for the group and
16.1 per cent for the better merchants. Smith sold less
on credit than the average and collected his accounts
somewhat more quickly than the average.
Smith has too much money invested in goods ; he does
not turn his stock rapidly enough. He has only two
stockturns per year compared with an average of 2.3
for the group and 2.4 for the selected stores. He has
more capital in proportion to sales than the average.
In spite of this, he did not receive the average amount
of cash discount and interest. Smith should reduce his
expenses for rent and delivery; he should increase his
rate of stock turnover; and he should watch his invoices
more closely and pay his bills promptly so as to secure
more cash discounts. By reducing his stock of goods,
he will have more money available with which to take
cash discounts.
The outstanding trouble with Smith's business is the
poor showing made by his salesmen. Their annual sales
are $14,071 each— $3,275 (19 per cent) below the av-
erage. He also pays his men higher than average sal-
aries. He has too many salesmen for his volume of
sales. He should either let one of them go or increase
his volume of sales. Smith apparently has five sales-
men and spends a part of his own time in selling. If he
Operating Expenses 353
should let one salesman go and maintain his sales, the
average sales per salesperson would be about $17,300 or
average for the group. The elimination of the salary of
one salesman would decrease expense by 1.8 per cent
and increase profit by the same percentage.
Smith's salesmen do not sell more than the average.
It would seem, therefore, that their salaries should be
reduced to the average or that the sales per man should
be increased. Reducing salaries to the average level
would decrease expense and increase profit by 1.8 per
cent. These two changes would increase profit, or in-
come, on investment from 3.7 to 10 per cent. Smith
takes a salary of $2,400 compared with an average of
$2,083. If he had taken only the average salary, his net
income from the store would have been correspondingly
increased. Thus, the principal trouble with Smith's busi-
ness is the fact that he has too many employees or pays
above-average salaries.
Another solution for Smith would be to increase his
volume of sales with his present payroll. He might
secure a more alert and better trained sales force. It
may be that his prices are too high ; this is suggested by
his relatively high margin. As he is spending more
than the average for advertising, it would seem that his
trouble is in a poor selection of goods, high prices, poorly
displayed goods, or poor salesmanship. He might try
to improve his business by a better selection and display
of goods and by improved salesmanship in his store.
Chapter 20
Review Questions
1. What expenses does a merchant incur in operating his
business?
354 Operating Expenses
2. Should a merchant include a salary for himself in
expenses?
3. When a merchant owns the building in which he con-
ducts his business, should he include rent on this building
as an expense?
4. If a dealer includes rent on his own building as an
expense, should the taxes, repairs, depreciation, and interest
on the value of the building be included as expenses?
5. Should a dealer include interest paid on money bor-
rowed at the bank as an expense?
6. Should a dealer include estimated interest on his capi-
tal invested in the business as an expense?
7. How may a dealer group or classify his expenses?
Which is the most widely used classification?
8. How are returned goods and allowances made to cus-
tomers for defective goods shown on the operating statement?
9. How do you find the cost of goods sold?
10. How may cash discounts received on purchases be
shown on the operating statement?
11. How is net profit determined?
12. What is the relation between expenses and the kind of
goods handled?
13. What is the relation of expenses to the services rendered
customers? What is the retail grocer's estimated cost of
selling goods on credit and delivering them to the customers?
14. Why do the expenses of the merchants handling the
same kind of goods, rendering the same services, operating
in similar locations, and doing the same volume of business
vary so widely?
15. What is the relation of a merchant's operating effi-
ciency to his expenses?
16. How may a merchant measure his operating efficiency?
17. A dealer's books show the following figures: net sales,
$60,000; opening inventory (Jan. 1), $12,000; closing in-
Operating Expenses 355
ventory (Dec. 31), $18,000; purchases, $51,000; expenses,
$12,000. Compute the percentages of margin; of expense;
and of profit.
18. A dealer has $50,000 worth of goods on hand on Janu-
ary 1. During the year he purchases $200,000 worth of
goods; makes sales of $300,000; pays his employees $30,000;
pays himself $5,000; pays $12,000 for rent; pays $9,000 for
advertising; and pays $18,000 for other expenses. At the end
of the year he has $30,000 worth of goods on hand. Compute
this dealer's percentages of margin; of expenses; and of profit.
Thought Problems
1. William Edwards conducts a retail grocery store. His
books for the year show the following: opening inventory,
$5,000; purchases, $50,000; freight and trucking in getting
the goods to his store, $500; cash discounts taken on pur-
chases, $600; sales, $63,000; closing inventory, $4,500;
salaries of 4 salesmen, $4,800; rent, $600; advertising, $315;
delivery, $630; losses on bad debts, $315; salary of part time
office employee, $300; salary of proprietor, $3,000; interest
paid on borrowed money, $250; interest on $10,000 owned
capital, $600; other expenses, $1,990.
(a) Set up an operating statement and compute the per-
centages for the important items in the statement.
(b) Compute the percentage earned on the proprietor's
capital. Did Edwards make a profit or a loss during the year?
2. John Powell conducts a retail hardware store in King-
don, a town of 7,000 population. During the year he had
the following items on his books: gross sales, $82,000; returns
and allowances, $2,000; inventory on January 1, $28,000; in-
ventory on December 31, $32,000; purchases, $64,000; salaries
of 6 salesmen, $7,500; salary of proprietor, $2,600; other
salaries, $1,600; rent, $2,200; advertising, $1,000; loss from
bad debts, $800; delivery, $600; interest on borrowed money,
$900; other expenses, $2,800; interest received on notes and
accounts receivable, $400. Powell spent one half of his time
in selling and the other half in buying goods and managing
the store. The employees other than salesmen consist of an
356 Operating Expenses
office girl and a delivery boy. The total number of people
engaged in operating the store is 9. Sixty per cent of the
sales are made on credit, and it takes an average of 120 days
to collect outstanding accounts.
(a) Set up an operating statement.
(b) Criticize the operation of this store (refer to Table 30).
3. Newton's department store is located in a city of 100,-
000. In a recent year the books of this store disclosed the
following: gross sales, $720,000; returns and allowances, $20,-
000; opening inventory, $180,000; closing inventory, $155,000;
purchases, $440,000; discounts on purchases, $12,000; trans-
portation charges on purchases, $7,000; salaries and wages,
$120,000; rent, $35,000; advertising, $12,000; losses from bad
debts, $3,000; other expenses, $42,000; interest on owned and
borrowed capital at 6 per cent a year, $30,000.
(a) Set up an operating statement, computing the per-
centages.
(b) Compute the percentage which this business earned on
the investment (owned and borrowed).
(c) Criticize the operation of this store (refer to Table 28).
CHAPTER 21
Some Tests for Merchandising Efficiency
Tests for efficiency. — In addition to a study of margin,
expenses, and profit as shown in the preceding chapter,
certain other comparisons are valuable. Such compari-
sons may be called tests for merchandising efficiency.
Four important tests are: (1) the volume of sales per
person; (2) sales per square foot of space; (3) collection
period (the length of time it takes to collect for goods
sold on credit) ; and (4) the rate of stock turnover.
Volume of sales per person. — The salaries and wages
of salespeople are the merchant's largest expense. They
usually make up one-fourth to one-half of his expenses.
His total expenses and profits depend very largely upon
the efficiency with which he uses his own time and the
time of his employees, and the volume of business done
by each person is an important index to the efficiency
of his store. 'This can be found by dividing his sales by
the total number of people engaged in the operation of
the business.1
As the volume of sales per person increases, the ex-
pense percentage declines and profits increase. This is
illustrated by the figures covering the operations of
grocers and hardware stores shown in Table 31.
1 For purposes of computing the average volume of sales per person,
part-time employees should be reduced to a full time basis. Thus if
the regular employees work 48 hours a week, persons working 16 hours
a week would be considered as one-third of a full time employee.
357
358 Some Tests for Merchandising Efficiency
TABLE 31.— RELATION OF SALES PER PERSON TO LABOR
COST AND PROFIT
RETAIL GROCERS
Average Sales per Expense for Salaries
Person Employed and Wages (Percent-
ages of Sales)
Under $9,000 13.2
$ 9,000-10,000 12.0
11,000-12,900 12.0
13,000-14,900 9.9
15,000-16,900 9.6
17,000 and over 8.4
Average $12,200 10.9
RETAIL HARDWARE STORES
IN TOWNS OF 10,000 TO 50,000 POPULATION
Sales per Person Percentage of
Employed Earnings on
Sales
$ 8,309 1.2 loss
10,160 2.8 loss
12,027 8 profit
13,239 1.3 profit
15,927 2.4 profit
Employees perform different services. — The merchant
uses labor for many purposes: to make sales; to make
purchases; to deliver goods; to unpack, mark, and ar-
range stock in the store; to arrange window displays;
to keep records; and to make collections. The efficiency
of each of these operations is important. All operations
cannot, however, be judged by the same standard. The
bookkeeper is to be judged by her speed and accuracy,
the delivery boy by his speed and politeness, and the
window display man by the attractiveness and timeliness
of his displays.
Sales per salesman. — Most merchants have a record of
the volume of sales made by each of their salespeople, as
this information can be easily secured from the cash
register or sales slips. The merchant thus has a definite
measure of the performance of each salesman.
Most salesmen in retail and wholesale stores are paid
Some Tests for Merchandising Efficiency 359
either straight salaries, or salaries plus bonuses or com-
missions. The earnings of retail salesmen do not ordi-
narily increase in proportion to the increase in their
volume of sales. The volume of sales made by a sales-
man depends upon his ability as a salesman; and upon
factors beyond his control, such as the attractiveness of
the merchandise, the prices of the goods, the advertising
done by his employer, the reputation and location of the
store, the prosperity of the community, and other fac-
tors that bring customers into the store. Even when
the salesmen are paid straight commissions, the mer-
chant's expenses decline as the salesmen increase their
volume of sales, because the percentage of overhead
expense declines.
As the sales volume of his salesmen increases, the mer-
chant's expenses decrease and his profits increase. This
is illustrated by the figures in Table 32.
TABLE 32.— RELATION OF VOLUME OF SALES PER SALES-
MAN TO A MERCHANT'S EXPENSE AND PROFIT
WHOLESALE DRUGGISTS
Percentage of
Sales per Salesman Sales Force
Expense
Under $ 80,000 4.5
$80,000-119,000. . .3.7
Over 119,000 2.8
RETAIL CLOTHING STORES WITH SALES OF $40,000 TO $80,000
Volume of Sales per Percentage of Percentage of
Full-Time Salesman Selling Ex- Estimated
pense* Profits]
Under $12,000 6.0 4.5
$12,000- 16,000 ... 6.3 7.6
16,000- 20,000 4.6 8.9
20,000- 24,000 4.6 10.3
24,000- 32,000 4.3 9.4
32,000 and over 3U. 12.3
Averages $16,669 5.1 8.1
* Figures are for 1919, a year when prices were high and percentage
expenses low.
t Estimates for a normal year.
360 Some Tests for Merchandising Efficiency
Average sales per person. — Average sales for all
persons employed in retail stores were $8,908 in 1929 and
$5,613 in 1933. These figures include proprietors and
all employees. Averages for various types of stores are
shown in Table 33 for 1929.
TABLE 33.— AVERAGE SALES PER PERSON IN RETAIL
STORES IN 1929*
Type of Store Average Sales
Grocery and meat $12,277
Department stores, without food 8,339
Dry goods 8,074
Filling stations 8,610
Automobile dealers 16,532
Men's clothing and furnishings 12,231
Shoes 10,454
Furniture 10,342
Restaurants 3,642
Lumber and building materials 13,438
Hardware 9,055
Drug ' 7,964
Tobacco 8,311
* Census data. Part-time employees reduced to full time, on basis
that they work one-fourth of full time.
Irregular sales. — One of the main difficulties in secur-
ing a large sales volume per person is the bunching of
purchases by the customers. In the sale of clothing and
farm equipment, sales are largest in the spring and fall
seasons and are relatively light in the winter and sum-
mer. The jeweler gets his large sales volume during the
Christmas season. The florist gets his big volume for
special occasions, such as Easter, Decoration Day, Val-
entine's Day, and Mother's Day. The grocer gets his
big volume on Saturdays. Stores often find that busi-
ness is much better on fair days than on stormy days.
Sales are not evenly distributed throughout the dSy.
Many stores do most of their business during a few rush
hours. If a merchant has enough salesmen to handle
Some Tests for Merchandising Efficiency 361
business during the rush periods, some of them are usu-
ally idle at other times. This idle time reduces their
average sales volume. The merchant can attack this
problem in two ways. First, he can study his sales and
find his peaks and employ part-time salespeople to work
during his busy periods. The grocer may employ high
school students to work on Saturdays; and the depart-
ment store may employ married women, who want part-
time employment, to work during the rush hours and
for special sales. Part-time employees afford a good
solution if satisfactory salespeople can be found. The
grocer may have little trouble in finding suitable people
for part-time employment, whereas the furniture, jew-
elry, and hardware stores may have great difficulty in
finding competent salespeople who are available for part-
time work.
The second method is to try to even up the business
by increasing sales during dull periods. This may be
done by adding lines of goods that sell at different times.
Thus the coal dealer sells ice in the summer; and the
soda fountain, whose business is greatest in the summer,
adds lunches which sell the year around. Many stores
use special sales to attract customers in the morning
hours and on dull days. The advertising may be con-
centrated during the first half of the week, with the
purpose of building up sales during the first five days
in the week.
Better salesmanship. — Good salesmen sell more goods
than poor salesmen. Two salespeople work in the same
store and have the same opportunities, and yet one sells
50 or 100 per cent more than the other. The good sales-
man knows his goods, is polite and considerate of his cus-
tomers, and tries to sell them the goods adapted to their
needs. He uses suggestive selling bv telling his cus-
362 Some Tests for Merchandising Efficiency
tomers about new goods that have just been received
or by employing the telephone to call his customers dur-
ing dull periods and when new goods are received. In
such ways the salesman increases his sales and builds a
clientele of customers. The principles of salesmanship
are explained in Chapters 27-30.
Sales training. — The merchant can improve the qual-
ity of salesmanship by selecting his salesmen carefully
and training them thoroughly. He should tell them all
about the goods, show them how to handle customers,
how to make out sales records, provide them with in-
formation about the merchandise, and encourage them
to read trade papers.
Pay. — Perhaps the biggest task in improving retail
salesmanship is to overcome human inertia and laziness
and keep the salesmen constantly awake and interested
in their work. The method of paying salespeople has a
good deal to do with keeping them alert and active. Too
often salespeople are paid straight salaries. More use
should be made of bonuses, commissions, and prizes.
Salesmen may be rewarded for all of their sales over a
fixed amount or quota, for securing new customers, for
increasing sales over past periods, and so forth.
Size of sales. — Small individual sales limit the volume
of sales which a salesman makes. A salesman can sell
two cans as quickly as one, and it takes little more time
to sell a case than a package. The salesman may even
be able to sell a carton, case, bushel, or bag more quickly
than a few pounds, as he does not have to weigh or
measure the larger unit. Some stores try to induce their
customers to buy in larger quantities by making com-
bination offers, by suggesting larger purchases, and by
making lower prices on larger purchases. An article
priced at 10 cents per item or $1 a dozen often produces
Some Tests for Merchandising Efficiency 303
many sales by the dozen. A price card reading "5 for
25 cents" may produce more sales than a sign reading
"5 cents."
Store arrangement. — The store can be arranged to
speed up sales. The goods should be placed so that the
customers and salespeople can see and get at them easily.
The scales, measuring devices, telephones, and cash reg-
isters should be located where the salesmen can reach
them without extra steps.
"Goods well displayed are half sold" is an old motto.
Modern stores put many of their goods on counters and
tables where the customers can see and examine them.
This method of display reduces the amount of the sales-
man's time required to make sales. Some stores have
adopted the "self-service" method and allow the cus-
tomers to select their own goods without the help of
salesmen.
Rent. — Rent usually equals from 1 to 4 per cent of
sales in different types of stores, and makes up some
7 to 15 per cent of a merchant's total expenses. If heat,
light, and the other expenses connected with the oc-
cupancy of a building are included, rent is even more
important. The dealer with too much space tends to
allow stock to accumulate and become dirty or to re-
main so long on his hands that it goes out of fashion.
Too little space, on the other hand, cramps a merchant
in properly displaying his goods and limits the expansion
of his business.
By comparing his operating statement with that of
other similar stores, the dealer can learn whether his
rent is above or below the average. If his percentage
cost of rent is too high, he must find the cause before
he can remedy the situation. Does he have too much
space? Is the location too expensive for his purposes?
364 Some Tests for Merchandising Efficiency
Location. — Location is very important for a retail
store. Different types of stores need different kinds of
locations. A good location for one type of store may be
very poor for another type. Stores handling shopping
goods should be in shopping centers, while stores han-
dling convenience goods should be located where they
can be easily reached by the consumers. It may be de-
sirable to secure locations in residential districts, in rural
villages; at crossroads, on the corners of busy streets,
near suburban stations, and on automobile highways.
The merchant should study the matter carefully before
locating his store or changing his location.
Sales per square foot. — A comparison of sales per
square foot of floor space will help the merchant to de-
termine whether a high rent expense is caused by too
much space or by paying too much for the space. If
his percentage cost of rent is high and his volume of
sales per square foot is low, he has too much space. He
should use less space or increase his volume of sales. If,
on the other hand, his rent cost is high and his volume
of sales per square foot is high, he is paying too much
rent. Either the landlord is overcharging him or he is
using a location that is too expensive for the kind of
goods sold. A study of sales per square foot is valuable.
As yet there is, unfortunately, relatively little data avail-
able for comparative purposes.
The Harvard Bureau of Business Research has made
available figures for department stores, which appear in
Table 34. The rent paid per square foot tends to increase
faster than the sales made per foot. This is the one
reason why the percentage cost of rent increases as we
pass from the poorer to the better locations and from
the smaller to the larger towns.
Both sales and rent per square foot increase as the
Some Tests for Merchandising Efficiency 365
TABLE 34.— SALES AND RENT PER SQUARE FOOT IN
DEPARTMENT STORES*
SALES PER SQUARE FOOT RENT PER SQUARE FOOT
Sales Volume Selling Total Selling Total
of Stores Space Space Space Space
Under $1,000,000 ... $20.50 $15.50 $0.55 $0.40
$1,000,000-2,000,000... 30.50 22.00 0.85 0.60
2,000,000-4,000,000... 30.50 21.50 1.00 0.75
4,000,000-10,000,000... 40.00 24.80 1.50 0.90
10,000,000 and over. . . . 52.50 28.00 1.90 1.00
*Figures for 1927.
size of the store increases. Rent, however, increases
faster than sales. The rent per square foot on the total
space occupied increased from 40 cents to $1, or 150
per cent, while the sales increased from $15.50 to $28.00,
or 80 per cent. This tendency is even more marked
when the space used for selling is considered. The rent
per foot on selling space increased 245 per cent, while
the sales made on each foot increased only 156 per cent.
It will also be noted that the small stores used a larger
proportion of their space for selling than the larger
stores. The stores with sales under $1,000,000 used 73
per cent of their floor space for selling, while stores with
sales over $10,000,000 used only 53 per cent of their space
for selling. The other 47 per cent was used for stock-
rooms, offices, and other purposes. This indicates that
the larger stores perform more wholesale functions.
Customer frontage. — Many stores display their goods
on tables and counters where the customers may see and
examine them. This is done to increase sales. The
length of tables and counters on which goods are dis-
played is called customer frontage. The store layout,
or the way the fixtures are arranged, determines the
amount of customer frontage, and the same amount of
space may be so arranged as to give much or little front-
366 Some Tests for Merchandising Efficiency
age. A merchant may compute his sales per foot of cus-
tomer frontage.
Uses of capital. — The merchant uses capital princi-
pally for three purposes: to carry stocks of goods; to
extend credit to customers; and to pay current operating
expenses, such as salaries, rent, and advertising. Capital
used to carry stocks of goods is discussed in the next
chapter.
Collection period. — The merchant who sells on credit
does so to increase his sales, or to secure higher prices
for his goods. Credit is a definite service to many cus-
tomers. Credit sales, however, add to the merchant's
expense. They tie up capital in accounts receivable and
involve expanse in keeping records and making collec-
tion. The longer accounts are outstanding, the greater
the expense of collecting them and the larger the num-
ber that prove uncollectible and that must be charged
off as bad debts. It is thus important that a merchant
collect his accounts as quickly as possible without offend-
ing his customers. The promptness with which he makes
collections is an important test of his efficiency.
Let us consider the case of two dealers, A and B, each
of whom sells $100,000 during the year. A sells $36,000
on credit, while B sells $72,000 on credit. A has monthly
credit sales of $3,000, while B has monthly credit sales
of $6,000. A collects his accounts in 45 days, while it
takes B 90 days to collect his accounts. As it takes A
45 days (one and a half months) to make collections, he
has $4,500 tied up in accounts receivable, while B has
$18,000 in accounts receivable on his books. On the
basis of interest at 6 per cent, it costs A $270 and B
$1,080 to carry these accounts; A has therefore saved
$810 a year over B in interest cost. This saving is
equivalent to 0.8 per cent of sales. In actual practice,
Some Tests for Merchandising Efficiency 367
the money may be worth more than 6 per cent — if used
to take cash discounts on purchases, it may be worth
from 12 to 36 per cent.
Interest is only a part of the cost of extending credit.
In addition, there is the expense of keeping records of
credit sales, of making collections, and of bad debt losses.
Collection percentages. — Monthly collection percent-
ages are computed by dividing the collections made dur-
ing the month by the accounts and notes receivable on
the books at the beginning of the month. Thus if a
dealer has $5,000 in accounts receivable on his books at
the beginning of the month and collects $2,000 during
the month, his collection percentage is 40. A survey
covering nearly 6,000 manufacturers and wholesalers
with annual sales of 9 billion dollars showed that 90 per
cent of their sales were made on credit, and that the
average collection percentage was 48 in normal times.
This indicates that it took from 60 to 64 days from the
end of the month in which the sales were made to make
their collections.
Retailers make a smaller percentage of their sales on
credit. In 1929, 21 per cent of their sales were made on
open account credit, 13 per cent on installment credit,
and 66 per cent for cash. Open accounts (ordinary
charge accounts) are collected much more quickly than
installment accounts.2 During the depression a smaller
proportion of retail sales were made on credit. This
may have been due to a decline in the proportion of
large durable articles sold, to a greater reluctance of
people to go into debt, or to increased strictness on the
part of retailers in granting credit. In 1933, approxi-
2 At the end of the year, retail credit outstanding amounted to 5^4
billion dollars — 2% billion dollars of open accounts and 3 billion dollars
af installment accounts.
368 Some Tests for Merchandising Efficiency
mately 27 per cent of retail sales were made on credit.
In 1929, collection percentages on open accounts averaged
about 42 per cent. During the depression collections
were somewhat slower. Average percentages are shown
in Table 35.
Bad debts. — Merchants selling on credit usually find
some accounts uncollectible and must charge them off
as bad debt losses. The percentage of loss from bad
debts depends upon the class of people to whom credit
is extended, the care used in selecting those to whom
credit is extended, and the aggressiveness with which
collections are made. The merchant who extends credit
to poor risks must use aggressive methods in making col-
lections in order to limit his losses. Bad debt losses may
be stated as percentages of total sales or as percentages
of credit sales. The latter is the more accurate method.
Consider a merchant who has sales of $100,000, $40,000
of which are made on credit, and who has bad debt losses
of $200. His percentage of bad debt loss is 0.2 when
computed on his total sales, and 0.5 when computed on
credit sales. Figures showing bad debt losses for a large
group of retailers are shown in Table 35.
TABLE 35.— RETAIL BAD DEBT LOSSES AND COLLECTION
PERCENTAGES, 1929-1934*
1930 1931 1932 1933 1934
Bad debt loss on open account sales 0.5 0.6 0.9 1.4 1.2 l.C
Bad debt loss on installment sales .. 2.3 2.8 4.1 6.7 4.1 l.£
Collection percentage on open ac-
counts ....................... 42.7 41.3 38.9 36.2 36.7 41.9
Collection percentage on installment
accounts ................... 15.2 14.7 14.5 13.6 13.2 14.5
*Based on survey made by U. S. Dept. of Commerce.
Choosing the best credit policy. — Extending credit and
making collections add to the seller's expense, yet they
may also increase his sales and profits. Some sellers
Some Tests for Merchandising Efficiency 369
charge high prices and extend liberal credit; losses and
collection expenses may be high, and yet the higher
prices and increased sales may make such a policy prof-
itable. Other sellers find it profitable to sell at lower
prices and sell only for cash, or to limit credit to good
risks or extend credit only for short periods. The type
of goods handled, the policies of his competitors, the
customs in his trade or community, the kind of people
he has for customers, and economic conditions should be
considered in selecting the proper policy.
Chapter 21
Review Questions
1. What is meant by "Tests for Merchandising Ef-
ficiency"?
2. Name four such tests.
3. What is meant by the volume of sales per person? Per
salesperson?
4. What is the relation between the volume of sales per
salesperson and the merchant's expenses and profits? Why
this relationship?
5. How can a merchant know the volume of sales made
by each of his salespeople?
6. What factors limit the average volume of sales made by
salespeople in retail stores?
7. How can a merchant increase the average volume of
sales made by his salespeople?
8. What is the relation of sales training to the average
volume of sales?
9. What is the relation between pay of salespeople and
their volume of sales?
10. How should a merchant pay his salespeople to secure
a high sales volume per person?
370 Some Tests for Merchandising Efficiency
11. What is the relation between the arrangement of goods
in a store and the volume of sales per salesperson?
12. How does a dealer's expense for rent compare with his
expense for the salaries and wages of salespeople?
13. What is the danger of having too much space?
14. How can a dealer find out whether his cost of rent is
too high?
15. If a dealer finds that his percentage cost of rent is too
high, how can he find the cause and the remedy?
16. What is the relation of the location of a store to its
rent cost?
17. Why should a merchant compute his volume of sales
per square foot of floor space?
18. What are the merchant's uses of capital?
19. Why does a merchant sell goods on credit?
20. What is the relation between the prompt collection of
accounts receivable and a merchant's expenses?
21. Why is the prompt collection of accounts desirable?
22. What is meant by bad debts?
23. How are monthly collection percentages computed?
24. How do depressions affect bad debt losses and collec-
tion percentages?
Problems
1. Underwood and Black conduct a retail service grocery
store in a residential neighborhood of a town of 500,000 popu-
lation. During the year they have sales of $60,000 and the
following expenses: salaries for the two partners, $4,000;
salaries of 4 salesmen, $4,800; salary of bookkeeper and tele-
phone salesgirl, $900; salaries of two deliverymen, $1500; rent,
$600; bad debt losses, $700; other expenses, $1,000; margin,
$14,000.
(a) Compute the percentages of labor cost, rent cost, bad
debt loss, total expenses, and profit.
Some Tests for Merchandising Efficiency 371
(b) Criticize the conduct of the business.
2. Leonard and Blake conduct a retail hardware store in
a city of 10,000 population. Their operating statement for
the year shows the following: sales, $80,000; salaries of the
two owners, $6,000; salaries of 6 salesmen, $6,000; salaries of
office employee, $1,500; salary of delivery and stockman,
$1,000; rent, $3,000; loss from bad debts, $200; other expenses,
$5,000.
Compute the necessary expenses and criticize the operation
of the store.
3. The Empire is a department store located in a city of
500,000 people. It occupies a four story and basement build-
ing, 80 x 200 feet. The first two stories and the basement are
used for selling, and the two upper stories are used for stock-
rooms and offices. During the year, sales amount to $900,-
000. The Empire's operating statement prepared at the end
of the year shows the following figures: inventory, January 1,
$260,000; purchases, $460,000; inventory, December 31, $220,-
000; salaries and wages, $150,000; rent, $45,000; loss from bad
debts, $4,000; advertising, $25,000; interest on capital invest-
ment, $24,000; other expenses, $35,000; accounts receivable,
$150,000. Two-thirds of the sales are made on credit. The
store has 80 employees, 50 of whom are engaged in selling.
Criticize the operation of this store.
Thought Problems
1. Why does the average volume of sales per person vary
so widely in different types of stores? In different stores sell-
ing the same kind of merchandise?
2. What is the relation between the amount of space oc-
cupied and the way merchandise is displayed and the rate of
stock turnover?
3. Why are most retail salespeople paid straight salaries
or salaries plus bonuses on all sales over fixed quotas, rather
than on a commission basis?
4. What kind of locations do the following retailers need:
Grocery store? drug store? news stand? cigar store? millinery
372 Some Tests for Merchandising Efficiency
store? men's clothing store? women's clothing store? coal
yard? farm implement store? women's high-grade shoe store?
jewelry store? hardware store?
5. When should an account be charged off as bad (uncol-
lectible) ?
6. It is said that a firm collection policy builds sales ; that
a person tends to buy from the store where he knows his ac-
count is paid and his credit is good ; and that he tends to avoid
the store where he knows his account is long past due. Is
this true? Comment on the statement.
7. How can a merchant collect his accounts promptly
without antagonizing his customers?
8. Should a dealer compute his bad debt loss percentage
on his total sales or on his credit sales?
9. Is the number of dollars of sales per square foot of floor
space a better index of the dealer's efficiency than the per-
centage cost of rent? Why or why not?
10. Why do retail grocers collect their accounts more
quickly than retail clothing stores? Why are not groceries
sold on the installment plan?
CHAPTER 22
Stock Turnover
Meaning of stock turnover. — Stock turnover measures
the frequency with which goods are bought and sold.
It is the relation of sales to the quantity of goods car-
ried in stock by the merchant. Goods are bought,
placed in stock, and sold. When the quantity sold equals
the average quantity carried in stock, the merchant is
said to have turned his stock one time. Stock turnover
is usually stated as a certain number of times per
year.
How stock turnover is computed. — The rate of stock
turnover is computed by dividing the cost of goods sold
by the average inventory (quantity of goods on hand)
at cost. Thus if the cost of goods sold during a year is
$20,000, and the average stock is $5,000 at cost, the
merchant has turned his stock 4 times. Many dealers
take inventory only once a year. When this situation
exists, the average inventory figure is obtained by adding
the inventory at the first of the year and the inventory
at the close of the year and dividing by two. It is, of
course, desirable to take stock monthly or quarterly, or
to keep a continuous or perpetual inventory. The latter
is known as "unit control" of stock.
Advantages of a rapid rate of stock turnover. — A
rapid rate of stock turnover reduces the dealer's ex-
penses, reduces the number of mark-downs, gives the
consumer fresher goods, and often lower prices. It usu-
ally increases the dealer's profits.
373
374 Stock Turnover
Reduced expenses. — A rapid rate of - stock turnover
reduces the quantity of goods carried in stock in rela-
tion to sales; the reduced quantity, in turn, requires a
smaller amount of capital and so reduces interest charges.
Taxes and insurance on goods in stock are likewise low-
ered. A smaller stock reduces the amount of space
needed by a merchant in which to conduct his business,
which cuts down his expenses for rent, heat, and light.
A rapid rate of turnover also reduces a merchant's
selling expenses. The dealer with a rapid rate of stock
turnover has lower expenses and may therefore place
lower prices on his goods. Low prices and fresh goods
increase his sales. He usually has his stock well ar-
ranged, thereby enabling the salespeople to get the goods
quickly. Because of fresher goods, lower prices, and bet-
ter arranged stocks, his salesmen usually have larger
volumes of sales than salesmen in stores which turn their
goods slowly.
Reduced mark-downs. — The faster goods are sold, the
less opportunity they have for going out of fashion or
becoming soiled, stale, or shelfworn. Thus mark-downs
are reduced. A rapid rate of turnover gets new fashions
to the consumers more quickly and allows foodstuffs
less time to wilt and decay.
Reduced margins. — The merchant with a rapid stock
turnover often sells at lower prices than other merchants.
He places low prices on his goods in the hope of increas-
ing sales and his rate of stock turnover, and he hopes
that the rapid rate of turnover will reduce his expenses
and increase his profits. In order to speed up his turn-
over, the merchant often buys in smaller quantities. It
is possible that this causes him to pay higher prices for
his goods by the loss of quantity discounts or that his
transportation costs are increased by the smaller ship-
Stock Turnover 375
ments. Whatever the reason, studies of the subject
show that dealers with high rates of turnover have some-
what lower margins than dealers with slow rates of turn-
over.
Increased profits. — A rapid rate of stock turnover
reduces both the merchant's margin and his expenses;
but, as a rule, expense is reduced more than margin, so
that profit is increased. Studies of operating statements
show that increasing the rate of stock turnover is one of
the surest ways of increasing profits.
Illustrative figures. — The effects of the rate of stock
turnover on the margin, expenses, and profits of a group
of department stores are shown by the figures in
Table 36.
TABLE 36.— RELATION OF RATE OF STOCK TURNOVER TO
MARGIN, EXPENSES, AND PROFITS OF
DEPARTMENT STORES*
Average of
All Stores
Rate of stock turnover: Under 2 2-2.9 3 and Over 24
(Percentage of Sales)
Margin 29.9 29.4 28.3 29.3
Salaries and wages 17.0 16.2 14.6 16.1
Rent 4.2 3.7 3.8 3.9
Interest 3.5 2.4 2.1 2.9
Other expenses 7.6 7.5 7.0 7.4
Total expenses (including
interest) 32.3 29.8 27.2 30.0
Profit or loss (over interest) 2.4 loss .4 loss 1.1 profit 0.7 loss
*226 department stores with sales under $500,000 for 1929.
It will be seen from the figures in this table that the
margin decreased from 29.9 per cent for stores turning
their stock less than twice a year to 28.3 per cent for
stores turning their stock three or more times per year.
Total expenses, including interest; declined from 32.3
per cent to 27.2 per cent. This decline was equal to 5.1
376 Stock Turnover
per cent of sales. As the expenses declined much faster
than the margin, those stores turning their stocks rap-
idly had larger profits than the stores turning their
stocks slowly. The stores with less than three turns a
year showed a loss after paying interest; this meant that
they failed to earn a fair rate of interest on their invest-
ment. Only those stores turning their stocks three or
more times a year earned profits larger than the interest
on their capital.
How to increase rate of turnover. — The dealer can in-
crease his rate of stock turnover by decreasing the
amount of goods carried in stock, by increasing his sales
and carrying the same or less stock, or by both increas-
ing sales and decreasing stock.
Decreasing stock. — The merchant can decrease his
stock in two ways. He can continue to carry the same
number of articles in stock but carry a smaller quantity
of each article, or he can decrease the number of articles
carried.
Small-order buying. — In order to reduce the total
value of the stock and yet carry as many different items
as ever, it is necessary to buy in smaller lots and buy
more frequently. This is called small-order, hand-to-
mouth, or current-need buying. Suppose that a dealer
has daily sales of 24 cakes of a certain brand of soap
which he has been buying 10 cases at a time. Each case
contains 144 cakes. Each purchase lasts for 60 days.
In order to increase his rate of turnover, he may buy
one case at a time and place an order every six days.
To keep from running out of stock, the new order may
be placed for delivery when the new case is one-half
gone. The dealer thus carries a three days' reserve and
can continue to supply his customers if delivery is de-
layed for three days.
Stock Turnover 377
This method of buying enables the dealer to reduce
the size of his stock without losing sales. A good system
of stockkeeping and ordering, howfever, is necessary to
the success of this system. These are discussed in the
next chapter.
The merchant often hesitates to buy in small quanti-
ties if this involves higher prices by losing quantity dis-
counts. It is often profitable to buy in large quantities
to secure the lower prices. However, after careful study
many dealers have come to the conclusion that a rapid
rate of turnover is preferable to ordinary quantity dis-
counts.
Since style merchandise goes out of fashion quickly,
large purchases often mean that some of the goods must
be closed out at drastic price reductions, and such re-
ductions may easily outweigh the quantity discounts.
Perishable goods, such as fresh fruits, vegetables, flow-
ers, and meats, spoil quickly. The merchant who
overbuys suffers either from spoilage or from price re-
ductions made to sell the goods before they become
unsaleable.
On the other hand, staple, non-perishable goods, such
as canned foods, nails, overalls, and soaps, can be car-
ried in stock for considerable periods with little risk of
fashion changes or spoilage. The merchant can buy
such goods in large lots when quantity discounts are of-
fered. He should, however, weigh the price advantage
against the expenses incurred in carrying the goods un-
til sold — rent, interest, taxes, insurance, handling costs,
and the losses from theft.
Let us consider the case of a merchant who sells 1,200
cases of canned corn per year, or 100 cases per month.
Let us assume that this corn can be bought from the
canner on September 1 for cash at $2 per case, while if
378 Stock Turnover
it is bought from the wholesaler as needed throughout
the year, the price will be $2.30 per case, or a total of
$2,760. If the dealer buys the corn on September 1,
he will need only $2,400. The saving in price is $360.
The $2,400 will be invested for an average of 6 months,
if the corn is sold evenly throughout the year; therefore
if he can borrow money at 6 per cent, the cost of the
interest will be $72. Clearly, if interest is the only
expense, the merchant should buy the year's supply.
Other expenses, however, are involved. The ware-
house space necessary to store the goods, the cost of
placing them in the warehouse and taking them out, and
the insurance on the goods must be considered. The
dealer must also assume the risk that the price of the
corn will drop before he sells all of it and that he will
have to take a loss on the amount in stock when the price
drops. The merchant may be able to use his money
more profitably in other ways, for example, in taking
cash discounts. After all these factors are considered
the dealer may conclude that it is wise to buy the corn
in small lots from the wholesaler.
Small-order buying, if properly used, can speed up
turnover and reduce expenses. It is possible to carry as
complete stocks as when goods are bought in larger quan-
tities, and sales may actually be increased by having
fresh goods in stock at all times. If, however, small-
order buying is overdone or poorly executed, the dealer
may have incomplete stocks and may lose sales. A good
stockkeeping system is needed to enable the system to
be used successfully.
Carrying fewer articles. — Another method of reducing
the amount of stock carried is to stop handling the slow-
selling articles. When a merchant studies his sales, he
usually finds that he has in stock many items for which
Stock Turnover 379
he has very little demand. A grocer may handle 12
brands of coffee and find that 85 per cent of his sales are
made from three brands. One drug store formerly car-
ried 50 brands of talcum powder and 75 brands of soap.
It dropped 30 brands of talcum powder and 50 brands
of soap and reported little or no loss in sales. A large
drug store in New York City formerly had sales of $700,-
000 and carried some 20,000 items in stock with an av-
erage inventory value of $70,000. The number of items
was reduced to 13,000. This reduced the investment in
inventory to $50,000, and the smaller inventory increased
its sales to $1,000,000.
Many successful merchants have stopped carrying the
slow-selling articles — have "cut out the shelf warmers."
They have studied their sales records and have stopped
handling the articles, brands, colors, and sizes that have
little demand. They give their attention to the popu-
lar, fast-selling items. This has been done by many
chain stores. These merchants say that it is poor busi-
ness to carry items that sell so slowly that they are un-
profitable— that it is better to lose a sale now and then
than to lose money on a lot of slow-selling merchandise.
They say: "Let the customer seeking the unusual article
go elsewhere, or order the desired article for her/'
Another method of reducing the number of articles
carried in stock is to reduce the number of price lines.
Some dealers carry articles in stock at so many differ-
ent prices that the customers are confused, and they
often find that sales increase when they put all of their
goods into a few price lines. Some stores carry such
goods as dresses, suits, and shoes, at only one, two, three,
or four different prices.
Danger in reducing the number of articles carried. —
Reducing the number of articles carried in stock is dan-
380 Stock Turnover
gerous if done by guess or if carried to the extreme. The
dealer reduces the number of brands carried and finds
that he can usually substitute one of the brands in stock
when a discontinued brand is requested. He, however,
has no way of knowing how many of his customers go
to other stores when they next want to purchase the
discontinued brand. Suppose a store that carried 12
brands of coffee discontinues the 8 slow-selling brands.
Most of the customers who have previously bought the
discontinued brands of coffee buy one of the four popu-
lar brands and are satisfied. Some, however, feel that
their favorite brand has a superior flavor and may not
like the substitute brand. When they next want coffee,
they go to a store that has their favorite brand, and
while they are in this store, they are very likely to buy
many other articles besides coffee. Carrying a full line
of goods is a good way of attracting customers.
In the case of shopping goods, large stocks are es-
pecially desirable, as shoppers like to make their selec-
tions from large assortments. A woman wants a dress.
One store has only a few dresses of her size, none of
which seems to suit her. She goes to another store that
has a large number of dresses in her size. She may buy
a dress just like one that she saw at the first store, yet
the first store lost the sale. Merchants selling shopping
goods should carry stocks large enough to make good
displays and create favorable impressions on their cus-
tomers.
The number of items carried in stock may be prof-
itably reduced under some conditions. A store must,
however, use common sense in discontinuing slow-selling
articles. In the case of articles that are more or less
staple, as coffee, talcum powder, and soap, the demand
for particular brands may depend largely upon the
Stock Turnover 381
whims of the consumers. For example, when customers
are induced to try different brands, they may find they
like them as well as the brands formerly used; or, again,
it may make little difference to the consumers whether
they buy products in 10 or 12 ounce containers, one of
which sizes may be eliminated.
The number of articles carried may be reduced when
the dealer has spread his capital over too many lines.
The garage adds the agency for a radio, the grocery store
adds automobile tires, and the drug store carries electri-
cal merchandise. In such cases the dealer is not usually
equipped either to sell or to service the goods. He does
not carry enough stock to attract customers, and his
salesmen do not know enough about the goods to talk
about them intelligently. Many stores have added new
lines until their stores are literally "junk shops." There
are thousands of dealers who should reduce the number
of lines of goods which they are trying to sell.
The dealer should discontinue those articles for which
there is little or no demand among his customers. An
example was a city drug store which had veterinary cap-
sules on its shelves.
The dealer may purposely eliminate the slower-selling
items with a full knowledge that he cannot satisfy every-
body. He expects to secure a rapid rate of stock turn-
over and reduce his expenses and selling prices. He
makes a bid for business on the basis of low prices. He
attracts customers by his prices, sells them the fast-
moving goods, and lets them go elsewhere for the slower-
moving articles. This policy is best adapted to stores
located in busy shopping sections.
Advantages of full stocks. — The store with complete
stocks attracts customers who want articles not carried
by other stores, and it has an opportunity of securing
382 Stock Turnover
them as regular customers for all of its goods. It se-
cures a reputation for having a complete stock. Be-
cause the automobile has made trade mobile, people who
do not find what they want at one store can easily visit
other stores.
Many of the grocery chains led in reducing the number
of articles handled and bidding for business with low
prices on the fast-moving staple articles. Some of them,
however, have definitely reversed their policy and in-
creased the number of articles carried in stock.
Increasing sales. — The merchant can increase his rate
of stock turnover by increasing sales and yet carrying
the same quantity of goods in stock. He may increase
his sales by securing better trained salespeople, by do-
ing more and better advertising, by better window dis-
plays, and by improving the arrangement and display
of goods in his store. These methods may be used re-
gardless of stock turnover. However, the two methods
of increasing sales that are most directly connected with
stock turnover are to have lower prices and to secure
fresher goods.
Lower prices. — Some dealers lower their prices in order
to increase their sales and thereby increase their rate of
stock turnover, and the higher rate of turnover is counted
upon to reduce expenses and increase profits. Even
if the percentage of profit is not increased, the number
of dollars of profit may be larger. This method of in-
creasing profit has been, and is being, used successfully;
however, many dealers have attempted it unsuccessfully.
If the lower prices do not increase sales, if increased sales
do not increase turnover, if increased turnover does not
reduce expenses more than gross margin is reduced by
the lower prices — if the attempt fails in any of these
respects, the policy will be unsuccessful.
Stock Turnover 383
TABLE 37.— TYPICAL RATES OF STOCK TURNOVER*
RETAILERS
Type of Store Times per Year
Groceries 10.0 to 15.0
Jewelry 0.8 to 1.0
Shoes ... 2.0 to 2.5
Hardware 2.0 to 2.5
Men's clothing . 2.0 to 3.0
Tires and automobile accessories 3.5 to 5.0
Building materials . 3.0 to 4.0
Stationers . 2.7
Large department stores . 3.0 to 4.0
Small department stores 2.0 to 3.0
Drug . 2.0 to 3.0
WHOLESALERS
Type of Store Times per Year
Grocers (service) . 5.0 to 8.0
Drugs . 4.0 to 5.0
Automotive equipment . ... 3.0 to 4.0
Hardware . 3.0 to 3.5
Plumbers . .4.0
Dry goods . 3.5 to 5.0
Shoe ... 4.0 to 6.0
*Figures are from the Harvard Bureau of Business Research and
from estimates from Census figures.
TABLE 38.— EFFECT OF RATE OF TURNOVER ON MARGIN,
EXPENSE, AND PROFIT
PERCENTAGE OF SALES
Rate of Stock Margin Expense Profit over
Turnover Including Interest
Interest
Retail grocery stores:
Under 7 19.1 19.0 0.9
7.0-11.9 19.0 17.0 2.0
12 and over 18.8 16.7 2.1
Retail jewelry stores:
Under 0.8 42.3 42.5 0.2 Loss
0.8-1.1 40.5 39.1 1.4
1.2 and over 39.4 35.9 3.5
Wholesale drug stores:
Under 3.5 17.4 16.9 0.5
3.0-4.4 17.5 15.5 2.0
4.5 and over 16.4 . 14.9 1.5
Wholesale plumbing stores:
Under 3 21.4 23.7 2.S Loss
3.0-5.0 20.4 21.7 1.8 Loss
Over 5 19.0 17.8 1.5
384 Stock Turnover
Typical rates of turnover. — Typical rates of stock
turnover for various types of dealers are shown in Table
37 (page 383).
Turnover increases profit. — The figures in Table 38
(page 383) show how a high rate of stock turnover de-
creases expenses and increases profits for groups of stores.
Chapter 22
Review Questions
1. What is meant by stock turnover?
2. How is the rate of stock turnover computed?
3. What are the advantages of a rapid rate of stock turn-
over?
4. How does a rapid rate of stock turnover decrease ex-
penses?
5. Name seven expenses that are reduced by increasing
the rate of stock turnover.
6. What is the relation of the rate of stock turnover to
selling expenses?
7. What is the relation of the rate of stock turn to mark-
downs?
8. What is the relation between the rate of stock turn
and margin?
9. What is the relation between the rate of stock turn
and profit?
10. How does the rate of stock turn affect the margin, ex-
pense, and profit of department stores?
11. How can a dealer increase his rate of stock turn?
12. What is meant by small-order buying? What are other
names for the practice?
13. What are the advantages of small-order buying?
14. What are the disadvantages of small-order buying?
Stock Turnover 385
15. Under what conditions should a merchant reduce the
number of articles carried in stock?
16. What are the dangers in reducing the number of items
stocked?
17. What is the common sense way of reducing the number
of items carried?
18. What are the advantages of carrying complete stocks?
What is its psychological or goodwill value?
19. How may a dealer increase his sales?
20. How may lower prices be used to increase stock turn-
over? Is this method always successful in increasing profits?
Why or why not?
21. What is the relation between the rate of stock turnover
and the freshness of a dealer's stock?
22. John Smith, retail grocer, during the year has sales of
$40,000; purchases of $28,000; opening inventory at cost of
$8,000; and closing inventory at cost of $6,000. Compute the
rate of stock turnover. Is this a satisfactory rate?
23. William Oliver conducts a retail tire and automobile
accessory store. During the year his sales amount to $80,000.
He buys $70,000 worth of goods during the year. He has an
inventory worth $30,000 at cost on January 1, worth $50,000
on July 1, and worth $40,000 on December 31. Compute
Oliver's rate of stock turn. Is he turning his stock as fast as
he should?
24. The Wholsum Company operates a wholesale drug
business. During the year its sales amount to $10,000,000.
It purchases $8,500,000 worth of merchandise during the year.
Its five quarterly inventories are as follows: Jan. 1, $1,200,-
000; Apr. 1, $1,600,000; July 1, $1,500,000; October 1, $1,-
300,000; Dec. 1, $1,190,000. Compute the rate of stock turn-
over. Is this a satisfactory rate?
Thought Problems
1. Why do so many dealers "take stock" (an inventory)
only once a year? Is this a good practice? Why or why not?
386 Stock Turnover
2. Should inventories be taken when the inventory is high
or when it is low?
3. How should a merchant determine when (under what
conditions) to practice small-order buying?
4. What are the advantages and disadvantages of carry-
ing goods only in definite price lines? This policy often
means that the margin on different articles varies widely.
The policy is therefore often in direct opposition to that of
making each article carry its own expense plus a fair profit.
5. Is it possible for a dealer to carry full assortments of
goods and at the same time turn his stock rapidly? Discuss.
Does the answer to this question depend somewhat upon the
dealer's location and his volume of sales?
6. How does the amount of goods necessary to satisfy
customers vary with the type of merchandise? With the type
of customers?
7. Which can use small-order buying to better advantage,
a dealer in a large city or one in a remote rural district?
8. Why do some of the chain grocery stores carry more
articles in stock than they did a decade ago?
9. The store with a complete stock of goods often has a
slow rate of turnover and high expenses. It is hard for such
a store to meet the prices of stores with a limited stock and
a quick turnover. Under what conditions should a dealer
carry a large number of articles in stock, if this means rela-
tively high operating expenses?
10. It has been proposed that the retailers in the smaller
cities (say in cities of under 50,000 population) form a work-
ing agreement as to the lines of goods that each will carry.
One shoe dealer might agree to carry a full line of narrow
shoes; another, a complete line of wide shoes; a third, a full
line of arch support shoes. The stationery store might agree
to discontinue sporting goods, while the sporting goods store
would agree to discontinue radios and musical instruments,
and the music store to discontinue books and magazines. In
this way the town would have complete lines of all classes of
goods and so serve its customers better. The convenience and
Stock Turnover 387
availability of the goods would draw more trade from the
surrounding territory and so increase the city's trading area.
Evaluate this proposal. What are some of the difficulties
to be faced in securing and maintaining such an agreement?
11. John and Walter Brown operate a wholesale grocery
business in a city of 50,000 population. During the year,
their sales were $2,000,000; their purchases, $1,950,000; their
inventory on Jan. 1, $250,000; their inventory on Dec. 31,
$450,000; their expenses, $272,000, including interest at 6 per
cent on their $600,000 capital; and the salaries for each of
the owners, $20,000. Compute the rate of stock turnover and
criticize the conduct of the business.
CHAPTER 23
Stockkeeping
Objects. — The objects of stockkeeping are: (1) to
carry full assortments of goods; (2) never to be over-
stocked in any item; and (3) to limit the investment in
stock and speed up the rate of turnover. The ideal is
always to have on hand every item which is properly in-
cluded in stock when the customer asks for it and never
to be overstocked nor to have goods which become un-
saleable because of spoiling or style changes. This ideal
may never be fully attained, but the merchant should
come as close to it as possible.
Model stock. — A model, or balanced, stock is a stock
that contains all of the items which the dealer carries
in the right proportions. The stock should be properly
assorted as to types or kind of goods, models, patterns,
styles, sizes, colors, and prices. It has been said by an
eminent merchant * that a retail store should carry com-
plete assortments of goods in three, and only three, price
lines. The idea is that a store cannot cater to all classes
of people, and that it should select its class of trade and
buy goods at the proper prices for this class of trade.
This idea does not, of course, apply to a store in a smaller
town which must serve all the people in the community.
A stock can be heavy (fat) or light (lean) and com-
plete or incomplete. The present ideal is to have the
stock complete and as light as practicable, taking into
1 Edward A. Filene.
388
Stockkeeping 389
consideration such factors as quantity discounts on pur-
chases, possible delays in delivery, and dependability of
sellers.
One wholesaler 2 gives the following assortment of sizes
of men's $1.45 shirts for a retailer who carries a mini-
mum of 90 shirts at this price.
Size Number of Shirts
14 6
\±1A 12
15 24
15^ 21
16 9
163^ 12
17 6
90
The dealer who carries 180 shirts in stock may double
the number of each size carried in stock.
Finding the model stock. — The above assortment of
shirt sizes was determined by analysis of the wholesaler's
sales, stocks carried by retailers in various communities,
and salesmen's orders for a period of two years. A
dealer's stock may be based upon an analysis of his past
sales and upon predicted changes in sales based on
changes in styles, changes in the purchasing power of
the community, and shifts in consumer demand. A new
dealer may set up a model stock from information con-
cerning the experience of other dealers, perhaps secured
from wholesalers or manufacturers.
In analyzing past sales, the dealer should consider the
trend in sales to see if the sales of a particular article
are increasing or decreasing. With staples, such as flour,
canned foods, hardware, and work clothing, the trend
of past sales gives an accurate basis of forecasting future
2 Ely & Walker Dry Goods Co.
390 Stockkeeping
sales and hence of establishing model stocks. The past
sales records should be so analyzed as to show seasonal
sales of each article.
In the case of fashion goods, past sales records will
not tell the dealer the colors, fabrics, and designs that
will be popular in the future. For example, past sales
records will not tell him how many blue, black, and red
dresses he will sell during the coming season; they will,
however, enable him to forecast the total number of
dresses he will sell, the number of each size, and the
number at each price. In wearing apparel, past records
enable the dealer to set up a model stock as to sizes and
prices. Colors and silhouette may change, but people
still pay about the same prices for their garments (after
allowances are made for changes in the price level).
Sales records also enable the dealer to follow the trends
in fashions demanded by his customers.
Stockkeeping systems. — In order to control stock, the
merchant must have a Stockkeeping system. The fol-
lowing are some of the more important systems: annual
inventory with inspection of shelves, and want list;
tickler system or frequent physical inventories; unit con-
trol or the perpetual inventory system; and dollar con-
trol.
Annual inventory with inspection and want list. — An
inventory is an actual count of all of the articles in stock.
It is often called "taking stock." An annual inventory,
with frequent stock inspections and a want list, is one of
the most widely used methods of stock control; in many
cases, however, it gives the merchant little actual control
over stock. Under this method the dealer inspects his
shelves from time to time to see what items are short.
His salesmen, when making sales, notice items that are
running low and enter this information on the want list.
Stockkeeping 391
Too often, however, they do not notice the condition of
the stock or they forget to make the entries, and the
goods are called for by a customer before an entry is
made on the want list. In such cases, the dealer loses
not only sales but also the goodwill of his customers.
The merchant can compute his annual sales of various
items from his annual inventory figures and from his
purchase invoices. This can be done, but many thou-
sands of dealers do not do it. Even when sales are com-
puted in this way, the dealer has no information as to
the time of the year when sales are made ; he must trust
his memory for this information. The dealer, however,
can set up satisfactory model stocks for goods that sell
regularly throughout the year.
Dealers using the system of an annual inventory with
inspection and want list are usually overstocked in cer-
tain articles, while they are often out of items requested
by customers. This method can, however, be made fairly
effective if the dealer has his stock well arranged, if he
carefully and frequently examines his shelves, and if the
salespeople are very careful to report all items that are
low. One store has red flags or markers on its shelves
and drawers. These -are normally kept turned down out
of sight. Whenever a salesman finds that some item is
getting low, he turns the flag up — without delaying the
customer and without waiting to finish serving the cus-
tomer. The merchant then goes over his shelves daily,
comparing the stock of all items marked with red flags
with his model stock figures and placing orders for all
that are down to the minimum quantity.
Tickler system. — The tickler system consists of taking
frequent physical inventories — usually every month or
every week; many stores take monthly inventories; the
salespeople may remain a few minutes each night and
392
Stockkeeping
make a detailed count of all items in one department or
one line. Other stores may have the stock inventoried
during regular hours when there are no customers in the
department. A large store may have two or more people
who spend all of their time inventorying its goods. Fre-
quent inventories often lead to simplified stocks and to
a better arrangement of goods, as the employees devise
LINE OF GOODS
OR DEP'T)
ARTICLE
SIZE OR
STOCK
NO.
UNIT
COST
SELL-
ING
PRICE
SOURCE
IDEAL
STOCK
DATE
DATE
ON
ORDER
IN
STOCK
ON
ORDER
IN
STOCK
^O
^\
^
\^
^-*
^\
Fig. 29. — Form for stock record. This form has space for the de-
scription of each article — size or stock number, stockkeepmg unit, cost,
selling price, source of supply, and ideal stock — on each line. Many
articles can be entered on one card or sheet. Space at the right is
provided for successive inventories, which are then compared with the
ideal, or model, stock. A wider form than that shown here should be
used so that several inventories can be entered on one line. All articles
on one card are to be inventoried on the same date.
methods of reducing the work. Overstocks are disposed
of and the rate of turnover is increased.
The unbroken packages are counted as such, and
only the items actually on display or in broken packages
need be counted individually. Fixtures are often de-
vised so that a compartment on a table, a section of
shelf, a drawer, or a bin holds a definite quantity of an
article. The number of vacant places are noted and the
amount of each item on display is determined. To il-
lustrate, if a section of a table holds 72 items and there
are 4 vacant spots, the clerk knows that 68 items are on
display. If these same goods come 144 in a box, and 3
Stockkeeping 393
unbroken boxes are in stock, then there are 500 items in
stock. At times, goods of uniform weight are weighed
and the number is computed in this way.
The dealer compares the number of items in stock, as
shown by his inventories, with the number which should
be in stock, as shown by his ideal or model stock and
places orders accordingly. When the ideal stock is de-
termined, it may be entered on the left hand of the stock
record, and the columns at the right may be used for en-
tering the successive inventory figures. The dealer must
consider the number of articles on order (ordered but
not received), as well as the number actually in stock, be-
fore he places additional orders. (See Fig. 29.)
Frequent inventories enable the dealer to compute the
sale of each article for each season of the year. This
enables him to have large stocks when the goods are
most in demand and small inventories when the goods
are least in demand. The inventory figures also enable
him to compute sales trends during the year. If he
takes monthly inventories, he can watch the sales trend
of each article month by month, and increase or decrease
the quantities purchased accordingly.
Unit control, or perpetual inventory. — Unit control is
a method by which a concern keeps a constant account of
the number of all articles in stock. In order to start
the system, the number of each article in stock is ob-
tained from a physical inventory. Every time any goods
are received, the number is added to the number in
stock; when any goods are sold, the number is deducted.
Thus if a store had 25 cartons of % inch black type-
writer ribbons in stock, and 100 cartons are received, the
100 is added to the 25 and the record shows 125 cartons
in stock. If 15 cartons are sold, 15 is deducted, and the
record shows 110 cartons in stock. This method is
394
Stockkeeping
usually called a perpetual inventory by factories and unit
control by retail stores. Fig. 30 shows a simple form
used for this kind of inventory method.
The balance shown on the inventory record must be
checked from time to time with the amount actually in
stock as found by a physical inventory. The balance
shown on the stock sheet may be adjusted when the
ARTICLE.
STOCK No. OR SIZE-
UNIT (1 ARTICLE, CASE,DOZ.,GROSS)_
SOURCE x
(MNFXR OR WHOLESALER;
SELLING PRICE.
MINIMUM
QUANTITY-
COST..
QUANTITY
TO
. ORDER
DATE
R'C'D SOLD DATE HgflD R^D SOLD DATE
R'C'D SOLD
Fig. 30. — Form for unit stock control. A separate card or sheet
is used for every article. Information as to accounting unit, stock num-
ber or size, cost, etc., is entered at the top of the card. Only one line
is needed to enter a day's transactions. As the form has a number of
columns, one sheet will last for a considerable period of time.
periodical inventory is taken, or the stock clerk or clerks
may spend a part of their time each day in counting the
number of various items in stock. Records may be kept
of sizes, models, colors, prices, and makers of the goods.
Information concerning receipts may be obtained from
the purchase invoices. Information as to sales is obtained
from price tags or labels on the goods which are torn off
when sales are made, or from the sales slips. When the
sales slips are used, the salespeople must be very careful
to write the necessary information as to stock number,
size, or color on the sales slips.
Stockkeeping 395
Unit control may be used with goods on display or only
with reserve stock in the stockrooms.
Advantages of unit control. — Unit control enables the
merchant to know at all times just how much of each
item is in stock. The stock clerk watches his records and
whenever the balance of any article on hand is less than
the specified minimum quantity, he fills out an order
blank or notifies the buyer. When the system works per-
fectly, the merchant is never out of stock, unless a large
or unusual demand occurs or unless his supply of goods
is delayed unexpectedly. The system likewise enables
the merchant to watch his sales more closely than is
possible with any other system. Items that are selling
very slowly may be discontinued, and articles with in-
creasing sales are bought in larger quantities.
Disadvantages of unit control. — The two principal dis-
advantages of unit control systems are high cost and
inaccuracy. The clerical work involved in keeping rec-
ords involves expense. The cost of operating a unit con-
trol system runs from 0.2 to 1 per cent of sales.8 It is
sometimes said that it is practical to operate a unit con-
trol system for display stock when the selling price of
the items is $5.00 or more. With smaller items the cost
is said to be prohibitive. If the store keeps reserve
stocks, unit control can be used for the reserve stocks —
even for small items, such as hosiery and toilet articles.
Entries on the stock records are made only when goods
are received or taken from the reserve stock. As goods
are usually taken from the stockrooms in fairly large
amounts, the cost is not excessive. In order to reduce
the cost of keeping a perpetual record of goods on display,
various short-cut methods may be used. The tags or
3Nystrom, Paul H., Economics of Retailing, 1930 ed., Vol. 2, p. 428.
396 Stockkeeping
tickets for goods sold are collected daily and sorted, and
one entry is made for all sales made during the day. To
save the work of making a new entry every time a sale
is made, the number of items on hand may be repre-
sented by marks, thus, /////////• When an item is sold
it is crossed off, thus, ///////A- The number of un-
crossed lines shows the quantity in stock.
Some concerns have discontinued the perpetual inven-
tory because it was so inaccurate that they felt it was
useless or not worth its cost. Salespeople may fail to
drop the tags or tickets into the boxes, or may give the
wrong information on the slips so that the stock clerk
deducts the sale from the wrong article. The stock clerks
may make errors. Returned goods also give trouble.
Goods are charged off the record when sold, and if the
goods are returned, a record of this fact must be given
to the stock clerks or the record will be inaccurate. If
the goods are accepted on the sales floor and returned
to stock without a record going to the stockkeeping de-
partment, the stock record is bound to be wrong. When
it is remembered that in some shopping lines sold by
downtown stores, from 5 to 25 per cent of the goods are
returned, it is seen that this is no small problem. If the
unit control method is used, it should be used with great
care so that it will be accurate.
Unit control used by a chain of stores. — A chain of
women's apparel stores has a unit control system, all rec-
ords being kept in the main office. Each store mails in
daily tags from all garments sold during the day so that
the head office constantly knows how many garments of
each design, size, price, and color are in each store. The
sales of each store are watched closely and the buying
of goods becomes almost an exact science. This chain
Stockkeeping 397
was reported to have had the greatest increase in sales of
any national chain in 1930 — 32.7 per cent.4 Other chains
use tabulating machines and punched cards, a card
being mailed to the central office daily for each item sold.
Dollar control. — Dollar control (or financial merchan-
dise control) consists of keeping account of the goods in
stock in dollars rather than in units, or pieces, of mer-
chandise. When goods are received, they are entered on
the stock record at their sales value. When they are
sold, their value is deducted and the balance shows the
value of the goods in stock at selling prices. In using
this system, departments are broken down into lines of
classifications. For example, a small store divides its
men's furnishings into shirts, neckwear, gloves, socks, un-
derwear, nightwear, and miscellaneous. The stock record
shows the value at selling prices of the goods in each line
at all times. If the stock of shirts is too large or too
small (as shown by comparison with the model or
planned stock figures for this date), the dealer must
inspect or count the goods to find which patterns, sizes,
or colors are out of proportion. A larger store may divide
its shirts into collar and neckband styles and then divide
each style according to prices and sizes. The record may
show that the merchant has too few $1.45 collar-attached
shirts in size 15. He must then inspect his stock to find
what colors or patterns are short.5
4 The Business Week, March 11, 1931.
5 Dollar control is used with the retail method of inventory, under
which stock records are kept at selling prices and not at cost. This
method facilitates taking stock. When the inventory is taken at cost,
it is necessary to decide the costs on all merchandise, a procedure
which takes time and often causes errors. Dollar control is now gen-
erally used in the more progressive retail stores, but it must be used
with great care, as accurate records must be kept of all mark-ups and
mark-downs.
398 Stockkeeping
Advantages of dollar control. — With dollar control a
record is kept of the value of goods in each classification
at all times. Dollar control costs much less than unit
control, because only the total values of purchases and
sales are entered. A classification may contain several
dozen or several hundred different items. With unit con-
trol the sales of each of these items must be recorded,
whereas with dollar control only the total day's sales in
the classification is entered on the stock record. Dollar
control is thus applicable to small goods where the cost
of unit control is prohibitive. Dollar control fits in nicely
with the operation of a store's budget.
Disadvantages of dollar control. — Dollar control does
not give complete control of stock. The value of the
goods in a classification may be satisfactory, and yet the
stock may be poorly assorted. The dealer may have the
proper investment in $1.45 shirts, size 15, but have a
poor assortment of colors. To be really effective, dollar
control must be supplemented with frequent inspections
of the stock. It may be used with unit control or any
other method of physical stockkeeping.
Short-cut methods. — Some short-cut methods are used
by dealers who want to prevent out-of -stock reports and
yet save the cost of a complete stock control system.
One method is to label the minimum quantity which it
is safe to carry. Thus, if one case is the minimum quan-
tity, a label or card is placed on the case at the bottom
of the pile or on the case at the rear of the shelf. When
the salesman or stock clerk opens this case, he drops the
label into a box and the buyer knows that an order should
be immediately placed so that a new supply may be re-
ceived by the time the case is sold. The red flag system
mentioned above was used for the same purpose.
Stockkeeping 399
Chapter 23
Review Questions
1. What is meant by stockkeeping?
2. What are the objects of stockkeeping?
3. What is meant by a model stock?
4. What is meant by a light inventory? A heavy inven-
tory? A complete inventory? An incomplete inventory? A
balanced inventory? An unbalanced inventory?
5. How should an established dealer determine the goods
needed for a model stock?
6. How may a new dealer (or an old dealer who does not
have the necessary past records) determine the goods needed
for a model stock?
7. Can a model stock be fixed for style goods?
8. What are the important stockkeeping systems?
9. What is the most widely used system among retailers?
10. What is a physical inventory?
11. Can a satisfactory stock control system be operated
when an inventory is taken only once a year? If so, how?
If not, why?
12. What is a tickler system of stock control? How is it
operated?
13. Can the tickler system be made effective without ex-
cessive cost?
14. What is unit control? Explain its operation.
15. What are the advantages of unit control?
16. What are the disadvantages of unit control?
17. How may a unit control system be used for a chain of
stores located in widely separated towns?
18. What is meant by dollar control?
19. How is a dollar control system operated?
400 Stockkeeping
20. What are the advantages of dollar control?
21. Name the disadvantages, or limitations, of dollar control.
22. How can goods in stock be labelled to prevent out-of-
stock reports?
Thought Problems
1. Which system or systems of stock control are adapted
to the needs of the following types of retail stores: large de-
partment stores; large hardware stores; medium sized drug
stores; small grocers; medium sized shoe stores; small
women's clothing stores; small men's furnishing stores?
2. Which system is adapted to the needs of a wholesale
grocer? A wholesale hardware dealer?
3. MacMillan Bros, conduct a retail hardware store in a
town of 5,000 population. They have taken stock only once
a year, and they depend upon inspections of the stock or want
slips to tell them when they should order additional goods.
The traveling salesmen often inspect their shelves and tell
them what they need in their lines. They have many more
goods than they need, their turnover being very little more
than once a year. In spite of this, they must often tell cus-
tomers that the desired goods are out of stock. It often hap-
pens that the goods are actually in the store or stockroom
but are misplaced or hidden under other goods. The brothers
realize their entire stockkeeping system needs improving.
They ask you to work out a tickler system adapted to their
needs. Describe the system which you would recommend and
draw up the necessary stockkeeping forms. How would you
go about setting up or determining their model stock?
4. Johnson & Edwards, Inc., operates a men's clothing
store. They want to install unit control for suits, overcoats,
and shoes, and dollar control for their furnishings.
(a) Draw up the proper system for their coats and suits,
showing samples of any stockkeeping forms needed.
(b) Do the same for their shoes.
(c) Do the same for their furnishings.
(d) Show how they should determine their model stocks.
CHAPTER 24
Stock Arrangement and Display
Objects. — The objects of stock arrangement and dis-
play are to increase the sale of goods and to have the
goods easily accessible to the customers and salespeople.
Arrangement. — In laying out his store, the merchant
wants to arrange his goods so that the profitable goods
will be given the best locations; so that the store will
have an attractive appearance ; so that customers will be
drawn far enough into the store to see other goods than
those for which they entered;- so that the goods will be
convenient to the customers; so that salespeople can ob-
tain the goods quickly, display them properly, and wrap
them and make change in the minimum time; so that
the sale of new goods can be promoted ; so that the neces-
sary privacy is afforded customers in selecting such goods
as wearing apparel; and so that store services can be
properly handled. .
Location and rent. — The front part of the store is the
most valuable part of the building. In a building 100
feet deep, the front 10 feet are estimated to represent
about 25 per cent of the value of the entire first floor.
The next 20 feet represent 25 per cent of the value ; the
next 30 feet, 25 per cent; and the rear 40 feet, the re-
maining 25 per cent. Thus if a store room 40 x 100 feet
rents for $4,000 a year, the average rent is $1 per square
foot. The front 10 feet are worth $1,000, or $2.50 per
square foot. The next 20 feet have a value of $1,000, or
401
402 Stock Arrangement and Display
$1.25 per square foot. The next 30 feet have a rental
value of $1,000, or 83%^ per square foot, while the rear
40 feet have a rental of $1,000, or 62%^ per square foot.
In a store of two floors, the first floor is usually assigned
65 per cent of the rent and the second floor or the base-
E»;
Courtesy National Retail Hardware Assn. and U. S. Chamber of Commerce.
Fig. 31. — Old type of hardware store before remodeling.
•merit 35 per cent. In a store with more floors, the main
floor bears a smaller percentage of total rent.1
Because of the high value of the space near the front
of the store, goods are often placed there which have a
1 Various rules have been worked out for assigning value to lots of
different depths. The Hoffman Neill rule takes a lot 100 feet deep as
100 per cent, and expresses the value of other depths as percentages.
Thus one foot has a value of 6.8 per cent; 5 feet, 17.3 per cent; 10
feet, 26.0 per cent; 20 feet, 39 per cent; 30 feet, 49.5 per cent; 60 feet,
74.2 per cent; 80 feet, 87.7 per cent; and so on up to a 200 foot lot
which has a value of 130 per cent.
Stock Arrangement and Display 403
high volume of sales per square foot or which carry a
high margin. In a department, clothing, or dry goods
store, the space near the front door is often used for
hosiery, men's furnishings, lingerie, jewelry, handbags,
gloves, toilet goods, novelties, handkerchiefs, furs, or
goods on special sale. The front space may also be used
to build sales for new goods or goods which do not seem
to be selling as they should. Impulse goods are often
placed near the front of the store so that customers will
see them while going to the rear of the store for shopping
goods or for staples.
Appearance. — In order to secure a pleasing appear-
ance, such goods as overalls and knit underwear are
usually kept away from the front entrance. Goods of
attractive colors and pleasing appearance are often placed
near the front and along the main aisles. Low fixtures
are now generally used so that the customer can get a
view of the entire floor from any one place. Clean mer-
chandise and fixtures, bright lights, and colorful displays
add to the attractiveness of a store.
Drawing customers deep into the store. — In order to
draw customers deep into the store, the merchant often
places his shopping goods, articles on sale at especially
low prices, or staple necessities well toward the rear or on
upper floors. Because customers expect to devote some
time to the selection of shopping goods, they usually do
not object to going to the rear of the store or to upper
floors for them, and on the way they often see other
goods which they need. Goods on special sale are often
placed well back from the entrance for the same reason.
Staple necessities may also be placed well back in the
store. Care, however, must be used in doing this.
People want some convenience goods, such as cigarettes,
periodicals, toothpaste, razor blades, and sodas, in a hurry
404 Stock Arrangement and Display
and do not like to walk to the back of the store for them.
The drug store may compromise and place the fountain
half way back.
Customers' convenience. — The store should be con-
Courtesy National Retail Hardware Assn. and 77. S. Chamber of Commerce.
Fig. 32. — Same hardware store shown in Fig. 31 after remodel-
ing. Note the low wall shelves and the open display tables arranged
in aisles in the center of the store. The counters have disappeared.
The remodeled store looks betber and increases sales by a 'better display
of goods — by the placing of goods where they are easily accessible to
the customers.
venient to the customers. They become accustomed to
finding goods in certain places, and, other things being
equal, the goods should be kept in these places. Related
goods commonly bought or used together are often dis-
played together (ensemble displays). Thus, instead of
having all shoes in one department, men's shoes may be
placed next to men's clothing, women's shoes near
Stock Arrangement and Display 405
women's clothing, and chil-
dren's shoes with children's
clothing. Hosiery is often
kept adjacent to shoes.
Children's clothing is often
close to women's clothing,
as most children's clothing
is bought by women. In
line with this development,
the food store is replacing
the former grocery store,
butcher shop, and green
goods store.
Facilitating sales. — Goods
should be so arranged that
they are easily accessible to
the salespeople and that
proper space is available for
showing them to the custom-
ers. The arrangement of
store fixtures and the loca-
tion of wrapping counters,
scales, cash registers, and
credit telephones or tubes
affect the time it takes sales-
people to make sales; and
the dealer wants to secure a
high volume of sales for
each salesperson.
Promoting sales of new
goods. — New goods may be
given display space on tables
or counters or in preferred
locations although immediate sales do not justify the
Courtesy The Progressive Grocer.
Fig. 33. — Chart showing
wasted steps in a store with a
poor arrangement of stock and
fixtures. The wasted steps take
time and increase selling expense.
406 Stock Arrangement and Display
expense. This is done to build sales for the future or to
find the sales possibilities of the goods. Slow-moving
goods may also be displayed in preferred locations in the
hope of increasing their sale. Goods which do not sell
well in one location are often greatly benefited by a
change of location. The dealers should carry on a cer-
tain amount of experimenting all the time.
Privacy. — Some goods, such as wearing apparel that
needs to be fitted, arc best placed near the rear of the
store, on side aisles, or on upper floors. Many customers
like a certain amount of privacy in the purchase of such
goods.
Store services. — A store should be so arranged that it
can properly serve its customers in such matters as de-
livery, repair and alteration of goods, storage of goods,
and extension of credit. Proper facilities, such as locker
and rest rooms, are needed for the store employees.
Some stores operate restaurants and lunch rooms. Such
stores need facilities for receiving and storing the neces-
sary foods.2
Display. — Some stores hide their goods and bring them
out only as requested by the customers. This method
is used to some extent by exclusive shops in selling wear-
ing apparel. A method that is much more generally suc-
cessful is to put the goods out where the people can see
and feel them. Good salesmanship uses as many of the
2 In designing buildings, the architect must remember the necessary
plumbing connections for restaurants, soda fountains, barber shops, and
beauty parlors. In wiring a building, it is important to allow the
necessary outlets for overhead, display case, and window lights; fans;
and demonstrating lamps, washing machines, irons, lighting fixtures,
radios, stoves, heaters, and cleaners. Facilities must be planned for
heating, ventilating, and often cooling the store building. Many
stores are now air-conditioned, so that they maintain a uniform tem-
perature and humidity the year around and filter the dirt from the air.
uoiirirxu me progressive Grocer and, U. S. Chamber of Commerce.
Fig. 34.— Layout of a modern grocery store. Note that the
shelves are low so that all goods can be easily reached; that the scales
md cash register are in the rear to draw customers to the back of the
store so that they have the opportunity to see other goods that they
aeed; and that the island arrangement of fixtures allows free circula-
/ion of customers and places goods within easy view and reach. This
:>lan can be used in a building as narrow as 22 feet. A— candy; B—
-obacco; C— bakery goods; D— refrigerator for meats, butter, etc.;
E— special displays of such goods as dried fruits; F— table display of
Dackaged goods. See Fig. 14 in Chapter 9 for layout in narrower room.
\ wrapping table with scales and cash register in the front of the store
vould save much time in selling produce.
407
408 Stock Arrangement and Display
five senses — sight, touch, hearing, taste, and smell — as
possible.
Approved present display methods involve placing all
except the more delicate and valuable goods on open
display tables or shelves where they are easily accessible
to the customers. Long counters are not used. The
Courtesy A. /. Luther <& Co. and U. S. Chamber of Commerce.
Fig. 35. — Modern display table. Note that goods are placed on
top with price tags within easy reach of customers, while additional
items and reserve stock are stored underneath.
wall shelves are open to the customers, or samples are
displayed on panels attached to the doors of the cabinets.
Small tables and fixtures which are movable are used so
that they can be rearranged easily. The only counters
used are those necessary for the scales, cutting devices,
and the wrapping of packages. The salespeople sell on
the floor with the customers rather than from behind
counters. The best grade of goods, goods easily soiled or
Stock Arrangement and Display 409
broken, and valuable goods, such as high-grade jewelry,
may be kept in show cases or in drawers.
Fixtures. — Fixtures should be clean and attractive.
They should not be so conspicuous that they attract at-
tention to themselves. Their purpose is to display mer-
chandise— not to be admired. For this reason they
should be painted white or some dull color that does not
attract attention and that makes a good background for
the merchandise. Relatively cheap, wooden fixtures that
are repainted frequently and kept spotlessly clean are
satisfactory for most types of stores. Fashions in store
fixtures change, and the newest fixtures of today may be
obsolete in 10 or 20 years. Expensive fixtures therefore
may involve heavy depreciation charges.
Tables. — Display tables are usually about 34 inches
high and 30 inches wide. Goods are displayed on top,
while drawers or shelves are placed below for reserve
stock. It is desirable to have the drawers on ball bear-
ings. The bottom drawer or shelf should be raised 6
inches to permit cleaning the floor. (See Figure 35 on
page 408.)
Wall fixtures. — Wall fixtures seven feet high are rec-
ommended. This enables the salespeople and customers
to reach all the merchandise without using ladders or
stools. Since the eye seldom goes higher than seven feet,
there is very little display value in the upper shelves of
higher fixtures. Wall fixtures for many types of mer-
chandise (shoes are an exception) need a display ledge
the same height as the tables for showing goods to
customers. Some stores still use higher wall fixtures, but
those that have installed the lower shelves usually find
that they are able to display all of the necessary goods.
The upper shelves in the past have too often been used
for carrying dead stock.
410 Stock Arrangement and Display
Display cabinets. — The recommended height for cabi-
nets and other fixtures is five feet. This height allows
Courtesy Good Hardware.
Fig. 36. — Display panels in modern hardware store. Samples
are displayed on the panels. Goods for sale are stored on shelves
behind the panels.
the customer a free view of the store. Higher fixtures
may be used in or around departments, such as clothing,
where the customers want privacy.
Stock Arrangement and Display 411
Merchants who have changed from the old to modern
fixtures have often felt that they could not find room
for all of their goods on the tables and lower wall shelves.
As a rule, however, they have been able to display all
«.--»*» » COUNT*
5
Courtesy The Progressive Grocer and U. S. Chamber of Commerce.
Fig. 37. — Diagram of layout for modern grocery store. Note
dimensions to help in location of fixtures.
of the necessary goods in the new fixtures. Many found
that they had many goods in stock which should be dis-
continued, but some had to transfer a portion of their
goods to their stockrooms.
Customer frontage. — One of the primary goals of store
arrangement is to increase customer frontage, by which
412 Stock Arrangement and Display
is meant the number of lineal feet of fixtures upon which
goods are displayed to the customer. Some merchants
have doubled their customer frontage by adopting mod-
ern "model" layouts.
Window display. — The display windows are the most
valuable space in the store. Some writers place the value
of the windows as high as 25 per cent of the rent of the
first floor. Window displays are designed to attract at-
tention, to get people interested in the merchandise, to
get people into the store, to build goodwill for the store,
and to make sales. Windows may display merchandise
which is for sale, may show demonstrations of how goods
are made or used, or may present novelties or spectacles
which attract attention regardless of their reference to
the store's business. A display of war souvenirs by a
grocery store would be a novelty display. It might at-
tract a great deal of attention but would scarcely suggest
the purchase of groceries.
Types of windows. — The size and type of windows
vary with the goods to be displayed. The display of
furniture needs a large window, perhaps 14 to 16 feet
deep, while cigars, jewelry, and drugs may use a window
2 to 4 feet deep. The proper height above the sidewalk
also depends upon the goods to be displayed. Large
items like furniture should have low windows, say 16
inches above the sidewalk, while small items like jewelry
require higher floors in the windows to bring the goods
displayed up closer to the eyes of the passers-by.
Windows may be blind or open. Blind windows have
backs which shut them off from the stores. Such win-
dows are easier to light than open windows, are easier to
arrange, are adapted to a greater variety of displays, and
concentrate the attention of the passers on the window
displays. With the use of artificial light in the store,
Stock Arrangement and Display 413
blind windows have come into common use, especially
among wearing apparel and drug stores. Open windows
allow the passers-by to see into the store and, in a sense,
make the entire store a display window. Open windows
also allow the store to secure more natural light, although
some authorities feel that this is a doubtful advantage.
Open windows are often used by grocery, furniture,
automobile, and farm implement stores, and restaurants.
Building the display. — The first thing a display should
do is attract attention. Attention may be secured by
life, action, noise, color, light, size, demonstrations, or
novelties. A window with live animals (e.g., chickens
or rabbits) attracts much attention. Relatively few dis-
plays, however, can use life to attract attention. The
merchant can nevertheless suggest life by scenes showing
hunting, camping, fishing, or racing scenes, or showing
the use of the products. Action may be secured by arti-
cles in motion, such as mechanical devices, machines in
operation, and the flashing on and off of lights. A buz-
zer is occasionally used to attract attention by noise.
Music or a loud speaker may be used for the same pur-
pose.
Colors, especially bright colors, catch the eye and se-
cure attention. Flowers, fruits, women's apparel, dry
goods, wall paper, and meats can be relatively easily
used to attract attention by their colors. The use of
light to attract attention is discussed below.
The merchant who fills his window entirely full of
some article (soap, for example) attracts attention by
the unusual size of the display. This is known as mass
display. Demonstrations, when well staged, and novel-
ties, when well displayed, are excellent for attracting
attention. A common fault of such displays is that they
do not tie up with the goods which the store has for sale.
414 Stock Arrangement and Display
Window displays should be symmetrical and balanced.
The interest should be centered in the goods. The back-
ground stands, and accessories, such as ribbons, flowers,
and crepe paper, should make a background for the goods
and should not themselves attract attention.
Windows should not be overcrowded. Some display
men favor putting only a few articles in a window and
Courtesy Good Hardware.
Fig. 38. — Display window of a hardware store featuring sport-
ing goods. Goods carried by hardware stores permit many appealing
displays of hunting goods, fishing equipment, camping outfits, sporting
goods, and so forth. .
concentrating attention on these. They say that crowded
windows divide the attention of the passer-by so that
his desire is not aroused for any one thing. Stores selling
the higher priced or "exclusive" goods most frequently
devote an entire window to displaying one or two articles.
Other display men say that windows should be reason-
ably well filled. They argue that the windows are too
valuable to be only partly filled. They say that if a
passer-by is not interested in one article, another may
attract his attention. This seems to apply to stores
selling small convenience goods, as drug sundries. If
Stock Arrangement and Display 415
one doesn't need toothpaste, he may need razor blades,
hair tonic, soap, or shaving cream.
The merchandise displayed should be properly la-
belled and should bear legible price tags. The absence
of prices leads the passers-by to think that the goods are
so high priced that the dealer is afraid to display his
prices. The only stores which should omit the price tags
are those catering to a very exclusive trade.
Above all, the window should be clean; the merchan-
dise and background should be clean ; the displays should
be changed frequently; and the window should be well
lighted.
Store lighting. — Light attracts attention, allows cus-
tomers to inspect goods quickly, gives the store a cheer-
ful atmosphere, makes the goods appear clean and
attractive, increases sales, and reduces the number of
returned goods. One women's wear store across the
street from a theater found that with its windows un-
lighted only 35 per cent of the people used its side of
the street during the evening hours. It lighted its win-
dows and found that 53 per cent of the people used its
side of the street. With weak lights 2l/2 per cent of the
people stopped to look at the displays. With strong
light 34 per cent stopped. Another store improved the
lighting of its store, and the percentage of returned goods
dropped from 29 to 12 per cent. A drug and stationery
store had one-half of its lights turned on one cloudy day.
All of the lights were turned on, and sales increased 68
per cent.
Window lighting. — Windows should be brightly
lighted. The amount of light needed will depend some-
what upon the amount used by adjacent stores and the
color of merchandise and background in the windows.
For a window to stand out from its neighbors, it must
416 Stock Arrangement and Display
have more light or must have colored light. Dark colors
absorb more light than light colors. Therefore windows
containing dark goods need more light than those con-
taining light-colored goods. For most stores 200 watt
light bulbs placed from 12 to 24 inches apart should be
satisfactory. The lights should be kept clean and re-
placed before they are worn out. The lights should be
so placed that they shine on the displays and so that
there is no glare in the eyes of the people on the street.
Interior lighting. — Well-lighted interiors facilitate the
sale of goods and enable the customers to examine goods
to better advantage. Light stimulates action. Brightly
lighted stores enable customers to buy more quickly.
The amount of light needed varies with the color of
the walls, fixtures, and merchandise. Dark walls need
more light than light walls. Overhead lights should not
be further apart than one and one-half times their
distance from the floor. Thus lights placed 10 feet from
the floor should not be over 15 feet apart. Nystrom
points out that the average intensity of light used on the
main floor of department stores is about 1.27 watts per
square foot, which means that if lights are placed 15
feet apart, each fixture must have 286 watts. Somewhat
less light is ordinarily used on upper floors. The light
bulbs and fixtures should be kept clean. Lights should
be so arranged that there is no glare, and the lights
should be evenly diffused so that no places are dimly
lighted. Using more lights and placing them closer to-
gether enable the light to be better controlled.
There are three types of lighting fixtures: direct, in-
direct, and semi-direct. With a direct fixture, the light
shines directly on the goods. This is the poorest type
of lighting. With indirect fixtures, the light is thrown
on the ceiling and reflected on the goods. This gives
Stock Arrangement and Display 417
the most perfect diffusion but requires much more
current and therefore is more expensive than direct
lighting. The semi-direct fixture allows some light to
shine through the globe, while some is reflected down-
ward from the ceiling. Considering both results ob-
tained and cost, semi-indirect lighting is often the most
practical.
Chapter 24
Review Questions
1. What are the objects of stock arrangement and dis-
play?
2. What are the factors determining the proper location
of goods in a store?
3. What type of goods are placed near the front of the
store? Why?
4. How is the rental cost of a store distributed to the dif-
ferent parts of the building?
5. How does appearance affect the location of goods in a
store?
6. What devices do merchants use to draw customers to
the rear of their stores?
7. How should goods be arranged to meet the convenience
of the customers?
8. How may a store be arranged to save the time of the
salespeople?
9. Why are new goods sometimes given preferred location
in the store?
10. What consideration should be given to service facilities
in providing the store building and arranging the goods and
fixtures?
11. What rules should be followed in providing store fix-
tures?
418 Stock Arrangement and Display
12. What about the color of fixtures?
13. What use does the modern store make of display ta-
bles? What is the proper size of such tables?
14. What type of wall fixtures are recommended at pres-
ent? Why?
15. Why are low cabinets favored?
16. What is the value of the store's windows?
17. What are the objects of window display?
18. What may be displayed in show windows?
19. What determines the proper size and height of a store
window?
20. What are the advantages of blind and open windows?
21. How may a window display attract attention?
22. What rules should be followed in building window dis-
plays?
23. How much merchandise should be displayed in a win-
dow? Does this depend on the type of goods?
24. Why does a drug store sometimes put a great many
goods in its windows?
25. Should goods in a display window be labelled with their
prices? Why or why not?
26. What is the value of well-lighted windows to a store V
27. What are the rules for lighting store windows?
28. Why should store interiors be well lighted?
29. What are some rules for lighting store interiors?
30. What are the three types of lighting fixtures?
Thought Problems
1. What is meant by ensemble displays?
2. When should convenience goods be placed in the rear
of the store and when should they be placed near the en-
trance?
Stock Arrangement and Display 419
3. A store advertises a special sale of hosiery. Under
what conditions should the hosiery be placed near the en-
trance, and under what conditions should it be placed in the
rear of the store or on an upper floor?
4. A store selling women's shoes has no shoes in sight
except a few pairs in display cabinets and in the show win-
dows. When a customer comes in, she is seated and her foot
is measured. The salesman then goes behind a partition and
brings out a pair of shoes. If this pair is satisfactory, no
other shoes are shown the customer.
(a) Is this a good method of displaying and selling shoes?
Why or why not?
(b) If you feel that this method has some merit, to what
types of goods or to what types of customers is it applicable?
5. How is customer frontage increased by well-designed
layout?
6. Cohen Bros, have a one-floor-and-basement store han-
dling the following lines of goods: women's hosiery; women's
gloves; women's underwear; furs; handkerchiefs; towels;
women's coats; dresses; notions; handbags and novelties;
men's furnishings; men's suits and overcoats; work clothing,
including overalls, shirts, pants, socks, and shoes; house
dresses; women's shoes; men's dress shoes; blankets and bed-
ding; luggage; and kitchen supplies, such as cooking uten-
sils, cutlery, and woodenware.
(a) Which lines should be placed in the basement and
which on the street floor?
(b) The street floor is wide enough for a main aisle and
two side aisles, all three aisles running lengthwise of the store.
Draw a diagram showing the proper arrangement of the lines
which you would place on the street floor.
7. Alfred Jones pays $12,000 a year rent for the first and
second floors of a building on First Street, where he conducts
a men's clothing store. The building is 100 feet deep and 50
feet wide. What is the rental value per square foot of the
first floor? Of the second floor? What is the square foot
rental value of the various parts of the first floor?
CHAPTER 25
Buying
Success in buying. — Successful buying depends upon
knowledge of demand, quality, and prices. In carrying
on his work, the buyer needs bargaining ability, for there
is still much higgling over prices and terms. The buyer
should be industrious in seeking out sources of supply,
in shopping for the best goods and prices, in examining
goods, in gathering information concerning the goods
offered and the reliability of the sellers, and in inter-
viewing salesmen. Much statistical information is
needed, and a good filing system to keep information
available at all times is necessary. The buyer should
have a good personality to enable him to secure infor-
mation and the cooperation of the salesmen.
Present demand. — Present demand is found from rec-
ords of current sales and from want slips (records of
articles asked for by customers which are not in stock).
Stock control systems have been explained previously.
With such a system, the buying of staple goods becomes
almost automatic — the record shows when more goods
are needed and the source of supply, and orders are
placed in the regular routine of the business by the order
clerks or assistant buyers.
Future demand. — Estimating future demand is more
difficult and often more important than estimating
present demand. The best basis of estimating the future
demand for many 'articles is the trend of past sales. The
records show whether the sales of an article are in-
420
Buying 421
creasing or decreasing. Few, if any, goods are in steady
demand over a long number of years. The difference
between staples and fashion goods is that the demand for
staples changes more slowly than the demand for
fashion goods. The demand for hardware changes so
slowly that past sales records alone may furnish a good
index of future demand. On the other hand, the demand
for women's hats often changes so rapidly that trends
in past sales are only one of several factors to be con-
sidered.
A few illustrations will direct the reader's attention to
the importance of changes in demand. What has hap-
pened to the demand for rayon, seersucker suits, silk
shirts, stiff collars, high shoes, short skirts, golf clubsf
croquet sets, football equipment, lanterns, hammocks,
iron pots and pans for the kitchen, talking machines,
radios, harness, saddles, coal ranges, electric current*
electrical refrigerators, tractors, lettuce, carrots, break-
fast cereals, oranges, raisins, washing machines, and auto'
mobiles? The demand for each of these articles has
changed radically during the past 25 years and for many
of them during the past 10 years. There is, however, a
great difference in the rate at which the demand for
various articles changes. With some articles there is a
gradual increase or decrease over a period of years. With
other articles the demand changes very rapidly during a
few weeks or a few months.
Although articles go out of fashion, the demand for
them does not ordinarily stop entirely. A mail-order
house still carries Congress gaiters. In some sections of
the country the hardware stores do a good business in
grain cradles. Percussion caps for muzzle-loading guns,
croquet sets, and hammocks are still sold. The retailer
and the local wholesaler must consider the demand in
422 Buying
his territory rather than the demand in the country
at large.
Ordering and buying. — Ordering refers to the routine
placing of orders for goods shown to be needed by the
stock records. Buying includes the determination of
what articles are to be bought ; the seeking out of sources
of supply; the negotiating of prices and other terms of
purchases; and the making of contracts under which
orders are placed. Buying includes the purchase of goods
with variable, demand, fashion goods, fads, equipment,
and goods bought for special sales which cannot be
ordered in a routine way from stock records.
Fashions. — A fashion is a style that is in vogue or that
is enjoying wide popularity at a particular time. Mer-
chandise which is greatly affected by changes in fashion
is known as fashion (or style) merchandise. In buying
fashion goods, the buyer must study the trends in fashion
and forecast the future fashions. Fashion goods include
not only wearing apparel but furniture and household
furnishings, and, to some extent, foods, building mate-
rials, electrical goods, books, automobiles, and sporting
goods. It is often said that no goods are entirely free
from fashion changes.
In buying fashion goods, the buyer must study fashion
trends and forecast future fashions. Fashion forecasting
is difficult. Many goods go out of fashion and at some
later time come back into public favor, but there does
not seem to be a definite fashion cycle. An article may
return to favor in 10 years, 25 years, 50 years, or per-
haps never.
Manufacturers of clothing produce many new designs,
a few of which come into fashion. Stylists are often
employed by manufacturers and large stores to aid in
forecasting changes in the demand for fashion goods and
Buying 423
in designing artistic and useful products. Stylists and
buyers watch the trends in fashion centers, such as Paris,
Fifth Avenue, Palm Beach, and Hollywood. Many ar-
ticles, however, may be worn in such places and yet
never come into fashion throughout the country. All
fashions do not originate in such centers. They often
come from the people and may originate in any part of
the country. The midget radio came from California,
the mackinaw came from the lumber camps in the north
woods, and the galosh, or gaiter, is said to have come
into fashion among the co-eds in middle western uni-
versities.
Another method of securing information as to fashion
trends is to make counts and compute the percentages
of consumers who are using different types of goods.
If a count shows that 25 per cent of the women passing
a certain corner are wearing black dresses at one time,
while a month later 40 per cent are wearing black dresses,
it is evident that the trend of the fashion is towards
black. If in the following month 50 per cent of the
dresses at this corner are black, the fashion is still on
the increase. If the next month shows only 42 per cent
of the women wearing black, the fashion appears to have
passed its climax, and the dealer should stop buying
black dresses arid push the sale of those in stock. Future
counts will show whether the trend away from black
continues. Fashion counts show the goods in use, but
articles continue in use after their sale has stopped.
Frequent counts must therefore be made to find the
trends.
In order to buy fashion goods intelligently, the mer-
chant may study his sales records and want slips care-
fully, read fashion magazines, visit fashion centers,
obtain reports from organizations which compile data
424 Buying
and make forecasts, observe local fashions, and make
local fashion counts.
Weather. — The sale of many goods depends to a con-
siderable extent upon the weather. A cold winter in-
creases the sale of overcoats, gloves, ice skates, coal, and,
if there is snow, sleds and snow shovels. A hot summer
increases the sales of electric fans, garden hose, light
weight suits, cold drinks, ice, refrigerators, and ice cream.
A rainy summer increases the sale of lawn mowers and
haying machinery, as there is more grass to be cut. The
sale of lawn mowers is said to vary as much as 50 per
cent from one year to another.
The weather during the early part of the season affects
the sale of many articles. If the early part of the winter
is cold, the sale of overcoats, gloves, and many other cold
weather goods will be increased. On the other hand,
if the cold weather comes in February, people are think-
ing of spring and are inclined to make their old coats
and gloves finish the winter. Similarly an excessively
hot June will increase the sale of fans, refrigerators, and
palm beach suits more than a hot August. Recently
the temperature in the central west went below zero
just after Thanksgiving. A middle western glove manu-
facturer reported that as a result his sales were so good
he had to work overtime during the next six weeks to
keep up with his orders.
Weather cycles. — The weather influences many busi-
nesses. It would be very helpful if the weather could
be forecast for 6 months or a year in advance. Attempts
at long-range weather forecasting are common, but up
to the present time no entirely accurate method has
been devised. It has been observed that the weather
ordinarily comes in "bunches." Three or four cold
winters are likely to be followed by two or three mild
Buying 425
winters. Three wet and cold summers are often followed
by two dry and hot summers.1 Long-range weather fore-
casting by the use of cycles is not entirely accurate, but
it may be better than entirely ignoring future weather
in making purchases.
Business conditions. — Sales are affected by economic
or business conditions. When conditions are good, both
business concerns and consumers buy freely. When busi-
ness is poor, buyers curtail their purchases. Many
workers lose their jobs and many have their earnings
reduced. Others save money in fear that they will lose
their positions.
The buyer must therefore consider the future pros-
perity of his territory in making purchases. Many vol-
umes have been written on the subject of business
forecasting, and it is too big a subject to discuss here.
We shall only point out that what is generally called
the business cycle is an average made up of conditions
in all sections of the country and in all trades. One
section of the country may have good business, while
another section has poor business. One trade may have
increasing sales, while another trade may have declining
sales.
The buyer must base his purchases on the expected
sales in his trade in his territory. The general business
cycle is thus only one of several factors which he must
consider. The merchant in a steel town must consider
the condition of the steel industry, as this influences the
purchasing power of his customers. The merchant in
a trading center in the Corn Belt is interested in the rain-
fall in his community during July and August, because
1 United States Chamber of Commerce study. This statement refers
to the eastern portion of the Mississippi Valley. Farther west, the
proportion of dry years may be larger.
426 Buying
the rainfall and the acreage planted largely determine
the size of the local corn crop. The size of the local crop
and the price affect the purchasing power of his cus-
tomers. The price of corn depends upon the supply,
and the supply, in turn, depends largely on the carry-
over from the previous year and the July and August
rainfall throughout the Corn Belt.
The budget. — A budget is a carefully worked out plan
of the future sales, purchases, income, and expenses of
an organization. The sales budget is the estimated sales
for a future period. In a retail store the budget often
covers a six-months period divided according to months.
Future sales are estimated ou the basis of past sales,
trends in sales, expected changes in demand, expendi-
tures for advertising and sales promotion, and general
business conditions and prosperity in the trade area.
Sales are estimated by departments, lines, and classifi-
cations of goods. For example, total sales of men's shirts
may be estimated by months for a six-months period,
and these estimates may then be broken down by sizes,
prices, fabrics, styles, and colors. If designs, fabrics, and
colors are considered in the budget estimate, the figures
must be subject to change on short notice as changes
occur in demand.
When the sales budget is made, the buyer can set up
his purchase budget, which serves as a guide to the quan-
tities of the various articles to be bought. The budget
should be flexible so that it can be changed quickly if
changes in demand occur. The buyer should not, ordi-
narily, buy the entire amount called for by the budget
at the beginning of the period. He should reserve a part
of his allowances for the various lines of goods, in order
that he can buy new articles which come suddenly into
Buying 427
demand, or can increase his purchases of articles which
sell faster than anticipated.2
Quality. — A buyer should be a good judge of quality.
Some goods have been so well standardized that they
can be bought by grade or examined by trained in-
spectors to see that they come up to the specifications.
Some buyers determine the quality of goods needed and
lay down specifications upon which the sellers submit
prices. Many goods, however, are not standardized, and
the buyer must judge their quality in order to purchase
intelligently. Some buyers have spent years working
in factories or wholesale houses handling the goods, in
order to become good judges of quality. They develop
highly trained senses of sight and touch. In recent years
the laboratory has come to be widely used in determining
the quality of various products. Chemists and other
technically trained men find the chemical content, the
strength, the resistance to wear and tear, and the dura-
bility of various products.
Buyers often secure records of performance on the
goods offered for sale. If they have used the goods, they
have their own records; if not, they may obtain reports
from other users. Purchasing agents often exchange
such information. With a motor truck, for example,
the buyer wants to know the cost of operation per mile
or per ton of goods carried.
With goods bought for resale, the buyer wants to
know how the goods sell and how much profit is realized
2 In a department store the budget is originated by the buyers, who
work with the division merchandise managers. Their figures then go
to the controller and merchandise manager for revision. In a manu-
facturing concern the sales budget may be drawn up by the sales and
research departments and revised and approved by the chief executives.
The purchasing department can base its budget on the sales budget.
428 Buying
on their sale. Occasionally, stores keep records of goods
according to producers so that they know the net profit
realized on the goods bought from various sellers.
Prevailing prices. — It is sometimes difficult to know
the actual prices at which goods can be bought. In many
trades prices are quoted in trade or business papers.
Very often, however, goods can be bought for less than
the quoted prices, and many sellers give different prices
to different buyers. Brokers often give their principals
(employers) information concerning prevailing prices.
Buyers sometimes exchange prices quoted by various
sellers. The buyer often obtains prices from several
salesmen before placing an important order. In spite
of such precautions, many purchases are made without
the buyers knowing whether or not they have obtained
the lowest prices available in the market. This is an
advantage of belonging to a buying group (explained in
Chapter 12).
Future prices. — If prices are expected to advance, buy-
ers may buy enough goods to cover their needs for sev-
eral months. On the other hand, if prices are expected
to fall, purchases may be made on a hand-to-mouth
basis. Contracts are often made to cover the purchase
of goods months in advance of their delivery. In order
to make such contracts wisely, the buyers must forecast
the movement of prices in the future. If prices are ex-
pected to fall, the buyer often prefers to buy the goods
as needed unless the seller guarantees to give him the
benefit of any reduction in prices occurring prior to de-
livery. Buyers study price trends and attempt to make
purchases at times when prices are low.
Prices depend upon the supply of and demand for the
goods and the quantity of money and credit available.
Buying 429
The supply of a product may depend upon the weather ;
the acreage of crops planted; the stocks in the hands of
producers, dealers, and consumers; the cost of produc-
tion; and market prices. If the price is high, producers
increase their output, while if the price is low, they cur-
tail their operations. Demand depends upon population,
the income of the consumers, fashions, the weather,
business prosperity, living conditions, the price of the
product under consideration, the prices of competitive
or substitute products, advertising, sales promotion, and
the like. Some manufacturing and merchandising com-
panies have their own research departments to forecast
the movement of prices. There are also several concerns
that issue studies and forecasts of price movements for
those who subscribe to their services.
The work of the purchasing agent. — The men who do
the buying are usually called buyers in retail and whole-
sale stores, and purchasing agents in factories, mines,
public utilities, and institutions. The work of a pur-
chasing agent differs in many respects from that of a
buyer. In the first place, the purchasing agent usually
has to buy a great variety of goods. He has to buy ev-
erything from pencils and stationery to lubricating oils,
fuel, gasoline, motor trucks, machinery, and raw ma-
terials. Many purchasing departments buy thousands
of articles. It is impossible for one man to study so
many products and become an expert judge of their
qualities and prices. Some of the large companies have
several men in their purchasing departments, some of
whom specialize on certain products and become ex-
perts.
The purchasing agent buys many things that are requi-
sitioned by men in the organization. When he receives
430 Buying
a requisition for an article, he must find a source of sup-
ply and buy at the best price available from a seller that
offers the desired quality and service. In some instances
the producer is specified on the requisition, so that all
the purchasing agent does is to place the order.
In some companies the purchasing agent's job is
largely to buy the goods requisitioned by various de-
partment heads. In such a plant the purchasing agent's
duties are to seek out sources, negotiate terms, and place
orders. He is, in reality, a high-grade clerk rather than
an executive.
In other plants the purchasing agent is a real execu-
tive and selects many of the goods, determines the
sources from which they can be bought to best advan-
tage, determines the quantities to be purchased, and
actually makes the contracts or places the orders. In
such plants the purchasing agent may study business
conditions and forecast prices. On important purchases
he secures reports of the performance of goods offered
by various sellers and has the goods analyzed in his
laboratory or inspected by experts. He studies prices
and price trends. He may forecast the company's sales.
He determines the quantity of goods to be bought at a
given time in accordance with his estimate of future
prices and future sales. He is a real executive.
Reciprocity. — Reciprocity in buying means mutual
trade interchange — in other words, buying from certain
sellers because they buy from us. Reciprocity is more
important in business than is commonly appreciated by
outsiders. It has been referred to as "the purchasing
agent's nightmare," for the purchasing agent has to buy
from concerns specified by the higher executives or by
the sales department, regardless of whether these con-
cerns have the best products or the lowest prices.
Buying 431
Chapter 25
Review Questions
1. What factors are necessary for success in buying?
2. How can the buyer know present demand?
3. How can the buyer estimate future demand?
4. What is the difference between ordering and buying?
5. What is fashion?
6. What is meant by fashion forecasting? How is it done?
7. What is a fashion count? How made? What is its use?
8. What are the duties of a stylist?
9. How does the weather affect demand?
10. Should buyers study the weather and weather cycles?
11. What is meant by the business cycle?
12. How do business conditions affect buying?
13. What is a budget?
14. How should the purchase budget be made for a retail
store?
15. What is meant by saying that the budget should be
flexible?
16. How do buyers judge the quality of goods offered for
sale?
17. How may buyers secure information as to the actual
prevailing prices?
18. Why does a buyer need to know future prices?
19. What factors determine prices?
20. How can the buyer secure information as to future
prices?
21. How does the work of the "purchasing agent" differ
from the work of "the buyer"?
22. What is meant by reciprocity? Why has it been called
"the purchasing agent's nightmare"?
432 Buying
Thought Problems
1. How many items can you name that have been in
steady demand for 50 years? For 25 years? For 10 years?
Name products for which the demand has changed radically
during the past five years.
2. Why does the demand for various articles change?
3. Why do fashions change? Who is responsible for the
changes?
4. Are changes in fashion desirable? It is said, on the one
hand, that changes in fashion cause loss to the consumers
because the consumers discard goods before they are worn
out, and loss to the dealers through mark-downs on out-of-
fashion goods. On the other hand, it is said that fashion
changes are good for the manufacturers and dealers because
they stimulate sales, and for the consumer because he tires
of old products and derives pleasure (utility) from new
things.
5. What weight should be given to reciprocity in making
purchases?
6. How can one forecast future prices?
7. Purchasing agents often resent being told by shop
foremen, department heads, and high executives what brands
or makes of products to buy. They claim that these people
are too easily influenced by shrewd salesmen, friendships, or
personal whims. Purchasing agents argue that they are
trained to buy, to evaluate the arguments of salesmen, to
calmly judge the qualities of products offered by various
sellers, to secure reports from users of the products, and to
have laboratory tests made. As a result, they claim to be
better judges of the merits of the products offered by com-
peting sellers than are the men in the shops or the offices.
Evaluate this argument.
CHAPTER 26
Profits
Meaning. — Profit, or net income, as used in this chap-
ter, is the difference between margin (including "other
income") and the expenses incurred in the operation of
the business. Differences in the meaning of "profit"
arise because of differences in the expenditures that are
included in expenses. The bookkeeper often includes in
expenses only those things that are actually paid for in
the operation of the business. The economist, on the
other hand, says that expenses, or costs, should include
all amounts that must be paid to business men to induce
them to perform services. The economist includes all
items included by the bookkeeper and, in addition, pay-
ment for the owner's labor, capital, and risk. The econo-
mist argues that depreciation of buildings and equipment,
the salaries of the owners active in the business, and in-
terest on the owners' capital invested in the business
should be included in the expenses. It is evident that
the profit will be much less when these items are in-
cluded in expenses than when they are not included.
We have to know what are included in expenses before
we know the meaning of the "profit" shown on a con-
cern's income statement.
Economics teaches that under free competition prices
tend to equal costs and profits disappear. Only the
more efficient or the luckier (for example, persons own-
ing goods which increase in value) make profits. Several
studies of the operating statements of retail dealers show
433
434 Profits
practically no profits for the typical store after the in-
clusion of owner's salary, depreciation, and interest on
the owner's capital as expenses. The reports of 168
medium sized department stores in 1929 show average
profits of only 0.1 per cent of sales. This illustrates
the working of economic theory. It means that the
owners (of the department stores) made little more than
interest on their investment and salaries for their services
after the payment of all other expenses.
One trouble with putting owner's salaries in expenses
is the difficulty of estimating their fair value. The sal-
aries are fixed by the owners, who are not impartial
judges of the value of their own services. Salaries may
be placed too high ; this reduces the profit shown on the
operating statements. In fact, some owners appear to
prefer to take the earnings of the business out in salaries
and then say that they are making very small "profits."
Proper basis of profit. — This raises the question of
whether profits should be computed as a percentage of
invested capital or as an income for each owner engaged
in the business. In large corporations with many stock-
holders, the most satisfactory method is to state the
earnings as a percentage on the capital invested by the
owners. In small businesses, however, it might be pref-
erable to state the earnings as so much for each owner
actively engaged in the operation of the business. Thus
the merchant would say that he earned $3,000 rather
than say that he earned 15 per cent on his investment.
The commonly used method, however, is to state the
profit as a percentage of investment or of sales.
Variation in profits. — We have pointed out in the pre-
vious chapters that both margins and expenses vary
between different dealers. As profit is the difference be-
tween margin and expense, profits also vary. Expenses
Profits 435
vary more than margins because of differences in the ef-
ficiency of competing merchants and because of differ-
ences in luck — circumstances beyond the control of
individual merchants.1
Out of a group of retail dealers in a given year, 3 per
cent lost money; 22 per cent earned less than 6 per cent
on their investment; 33 per cent (one-third of the total)
earned from 6 to 11 per cent on their investment; 20
per cent earned from 12 to 17 per cent; 13 per cent
earned from 18 to 23 per cent; and 9 per cent earned
more than 23 per cent. Large profits are the cause of
business success and make some rich. Small profits, on
the other hand, cause dissatisfaction, while a lack of
profit leads to failure.
Object of business not profit. — It is often said that the
object of business is profit. We dislike this statement.
Business provides the machinery through which most
of our economic organization functions. The object of
business is to perform services (or functions) for the
consumers. The incentive which induces business men
to undertake the performance of these services is profit.
Profit is a reward for the efficient performance of these
services. Unless a business man is efficient (or lucky),
he does not receive a profit.
Average profits. — The average profits realized by
groups of retail and wholesale stores, as shown by their
operating statements, are usually from 1 to 6 per cent
of sales and from 5 to 15 per cent of investment.
The average earnings per man for each owner active
in the business, in a large group of rural dealers han-
1 To illustrate this variable factor of luck, a merchant secures a long-
term lease on a store building and the town starts to boom, greatly
increasing his sales and decreasing his percentage of cost for rent; or,
a merchant's customers are visited by a drouth, which greatly in-
creases his bad debt loss.
436 Profits
dling farm equipment in a good year, was found a few
years ago by a government study to be slightly over
$2,000 per year, after allowing 7 per cent on the invested
capital. A similar figure for the owners of retail hard-
ware stores, as found in a nation-wide survey made by
The National Retail Hardware Association, was $1,679.
Business success and failure. — Success in business
should perhaps be measured by how well a business man
performs services for the consumers, but in practice it
is measured by the financial rewards received. We may
say that a man is successful in business if he earns some-
thing more than a fair salary for himself and the or-
dinary rate of interest on his capital. We may think of
failure as a lack of success as just defined. It mayr
however, be better to divide business men into three
groups:
1. Successes. Those who earn fair salaries, in-
terest on their capital, and something more as a
profit.
2. Middle group. Those who earn more than ex-
penses but who have no profit over fair salaries and
interest on their capital. Such men earn modest to
fair salaries for themselves and low to average rates
of interest on their capital. A very large proportion
of business men come within this group.
3. Failures. Those who lose money, or who earn
less than fair salaries and no interest on their capi-
tal.2 A man may fail, as here defined, without
becoming insolvent, as he may sell his business before
all his capital is exhausted. He may remain in
business for years by taking out very little for his
personal services.
2 Or who earn not more than the average rate of interest on their
capital and nothing for their personal services.
Profits 437
It must not be assumed that a man stays permanently
in one of the three groups. Many business men change
from one group to another in different years.
The mercantile agency defines business failure as the
quitting of business with a loss to creditors — in other
words, as insolvency. This means that the concern go-
ing out of business has lost all its own capital and some
of the funds advanced by its creditors. Approximately
one per cent of the business concerns of the country fail
in this way during a year. However, more than one-
sixth go out of business each year.
Business mortality or turnover. — Several studies have
been made of business mortality, or the number of con-
cerns quitting business. A few of the facts from such
studies are summarized in the following paragraphs.
Illinois study. — A study of the dealers in 11 retail
trades in 255 Illinois towns from 1925 to 1930 was made
by the author. The facts are shown in Table 39.
TABLE 39.— PERCENTAGE OF DEALERS GOING OUT OF BUSI-
NESS IN ONE AND FIVE YEARS IN 255 ILLINOIS TOWNS
Per Cent Per Cent
Type of Stores Quitting in Quitting in
One Year Five Years
Hardware stores 5.2 27.8
Drug stores 7.0 24.3
Dry goods stores 7.9 35.5
Furniture stores 8.7 36.2
Clothing stores 8.8 36.2
Department stores 9.7 38.7
Meat stores 14.1 46.3
General stores 14.4 40.5
Garages 17.2 51.0
Grocery stores 17.5 49.5
Restaurants 28.5 64.7
Averages for 11 trades 15.9 46.3
A study of all kinds of retail business establishments
in two typical towns indicates that the averages of these
438 Profits
11 trades can be taken as representative of all retail
businesses.
These figures are based on the number of dealers who
were in business in 1925 and who quit during the follow-
ing five years. Those in business in 1925 include newly
established dealers, as well as those who have been in
business for a number of years. More dealers fail during
their first year in business than during any later year.
Many inefficient dealers enter business. They lack train-
ing, knowledge, capital, or industry, and are soon forced
out of business. The most grossly inefficient are pushed
out during the first two years. Those who stay in busi-
ness for two years have better chances of having long
business careers than new dealers just entering business.
The following figures show the percentages of all types
of newly established retail business concerns, in two
typical towns, which were out of business by the end of
the first, second, and third years after starting:
First Year... 31.4 por cent quit
Second Year 47 4 " " "
Third Year 58 7 " " "
Other studies. — Nystrom made a study of the business*
life and mortality of retailers in 7 trades in various Wis-
consin towns for periods between 1890 and 1912. His
results were similar to those found in Illinois. The facts
for Oshkosh are typical of his findings. There were 145
dealers in these seven trades in Oshkosh, in 1890. Only
18 of the original 145 were left in business in 1912.
From 1890 to 1900, 201 dealers entered business. Only
39 of these were still in business in 1912.
System magazine conducted in three middle western
cities studies covering the period from 1886 to 1916. In
Grand Rapids, Michigan, it was found that more than
Profits 439
one-half of the dealers quit business within ten years,
and more than two-thirds quit within 15 years. In Wa-
terloo, Iowa, it was found that 45 per cent of the
retailers went out of business within five years. In an-
other city, it was found that 40 per cent of a group of
retailers quit within five years. These studies included
manufacturers and wholesalers. It was found that the
rate of mortality was as high among manufacturers, and
almost as high among wholesalers, as among retailers.
Studies in Louisville and Fort Wayne show that the rate
of mortality among retail grocers has changed little dur-
ing the past forty years.
The approximate percentages of retail stores going
out of business annually in other cities have been found
in various studies to be as follows:
Percentage
Type of Store { Quitting
Per Year
Drug:
Chicago, 111 16
Buffalo, N. Y 13
Grocers:
Buffalo, N. Y 36
Louisville, Ky 25
Fort Wayne, Ind 22
Hardware:
Buffalo, N. Y 16
Shoe:
Buffalo, N. Y 22
A study of the figures presented in the foregoing para-
graphs indicates that the rate of mortality is somewhat
higher in large cities than in the smaller cities and
towns.
Why merchants quit business. — Why do so many
merchants go out of business each year? Some sell out
with a profit or retire. Some quit because of old ager
440 Profits
sickness, and death. Some quit because of insolvency —
failure in the legal sense. But by far the most quit be-
cause they are dissatisfied with their earnings. They are
losing money or making so little that they decide to
sell out and try other businesses or get jobs working for
others. Nystrom found in his study that merchants who
went out of business did so under the following condi-
tions :
PerCeni
Sold out or retired with a profit ... 9.5
Sold out at a loss 13.5
Failures or fizzles 61.5
Bankruptcies 3.0
Sickness and death 12.5
It will be noted that by far the largest percentage
failed or fizzled — that is, they quit business without
making any profit for themselves. Most of them seem
to have lost part or all of their capital. Thirteen and
a half per cent were definitely known to have lost money,
but only 3 per cent went through bankruptcy. Only
9.5 per cent were definitely known to have quit with a
profit,
A very large portion of those going out of business
later re-enter the same or another business. It is not
unusual for a man to spend his life in business and to
operate several different stores in the same or different
trades. Some stores he may sell at a profit, but more
often he sells at a loss or simply retains his original capi-
tal. He may work for another until he accumulates a
small amount of capital or may borrow enough to start
another small business. Very often the wholesalers ex-
tend sufficient credit to an experienced man to enable
him to enter business with little or no capital of his
own. Many men, however, have only one business en-
Profits 441
terprise of their own and, if it fails, are thereafter content
to work for others.
Why merchants fail. — Many studies have been made
to determine the cause of business failure. These studies
show that failures are caused by incompetence, lack of
capital, inability to meet competition, inexperience, un-
wise extension of credit, poor collection of accounts, poor
buying, slow stock turnover, poor location of stores, poor
accounting methods, poor salesmanship, fraud, specula-
tion, fires, floods, storms, robberies, sickness, and death.
These causes may be grouped under three heads: in-
efficiency; lack of capital; and external factors, such as
fires, floods, storms, robberies, sickness, and death, which
are beyond the control of the merchant. Broadly in-
terpreted, inefficiency includes poor buying, slow stock
turnover, choice of a poor location, lack of training, poor
collections, poor salesmanship, poor accounting, and
many other causes often listed separately.
Inefficiency and lack of capital apparently cause about
four-fifths of the business failures, while factors beyond
the control of the individual business man cause about
one-fifth of the failures.
TABLE 40.— CAUSES OF FAILURE OF 100 MEN'S
FURNISHINGS STORES
Cause of Failure Percentage of
Concerns
Lack of capital and over-expansion 33
Incompetence 17
Poor location , 13
Declining community 13
Speculation 7
Inability to meet competition 5
Fraud 4
Too much stock (slow turnover) 4
Lax extension of credit and poor collections 3
Dissension between partners 1
442 Profits
There is popular idea that it is easy to make money in
business. This leads many incompetent and inexperi-
enced people to enter business without sufficient capital.
TABLE 41.— FACTS ABOUT FAILURES OF DRUG STORES
(St. Louis)
Cause of Failure Percentages
Insufficient capital 40% of concerns
No capital of own when business started .... 37 '
No previous experience in drug business 17 '
Gross incompetence 33 *
Inadequate records 37 '
No profit and loss statement ever prepared . 93 '
Sickness (including old age) 10 '
Street construction obstructed entrance to
store 7" "
Depression caused decline in income of
customers 3" " "
Average rent paid by failing stores (4.7%
for active stores) 10.5% of sales
Average bad debt loss on credit sales (1.4%
for active stores) 16.5 " " "
TABLE 42.— FACTS ABOUT FAILURES OF 570 BANKRUPT
CONCERNS
(Boston)
Cause of Failure Percentages
Less than high school education over 67.0% of bankrupts
No previous experience in type of business . . over 50.0 " " "
No accounting records over 50.0 " " "
Inadequate accounting records 28.0 " " "
Not using credit bureaus 99.1 " " "
Bad debt losses on credit sales (average for
active concerns 0.6%) 5.6% of sales
TABLE 43.— CAUSES OF BANKRUPTCY AMONG
266 CONSUMERS
Cause of Bankruptcy Percentage of
Bankrupts
Extravagance 28
Evasion of judgment on foreclosed debts 15
Avoidance of liability on foreclosed real estate . 14
Decreased income 13
Domestic misfortunes 13
Speculation in stocks and/or real estate 7
Business involvements 5
Dishonesty 5
Profits 443
In one survey it was found that over half of the men
entering the retail grocery business did so because they
were out of work and had nothing else to do. Such peo-
ple are generally unsuccessful and lose their time and all
or part of their money. It is the withdrawal of these
untrained, inexperienced, and incompetent people that
causes the high rate of business mortality. This high
rate of mortality is bad. It involves a loss of time and
money to those who fail, and it involves bad debt losses
to manufacturers and wholesalers which must be passed
on to the consumers in the form of higher prices.
The ease with which business can be entered often
leads to an oversupply of dealers in many communities,
causing poor services to the consumers through incom-
plete or stale stocks and perhaps through high prices,
since too many people are trying to make a living from
a given volume of trade.
Remedies. — It is too easy to enter business. Four-
fifths of the failures are caused by inefficiency and lack
of capital. The situation might be greatly improved by
more education for business and by keeping out of -busi-
ness those who are obviously unfit and those who lack
a minimum of capital for the business which they pro-
pose to undertake. If this could be done, it would bene-
fit the rejected applicants as well as the consumers in
general. A movement is under way at this writing to
increase greatly the amount of instruction offered in the
high schools to prepare people for the distributive trades.
Several proposals have been made for limiting the
number of people entering business. One method that is
gaining widespread popularity is city zoning. Zoning
limits the districts in which new businesses can be started
and so is said to reduce the- number of small neighbor-
hood stores. Another method is to refuse licenses to new
444 Profits
dealers in communities that are already fully supplied
with similar stores. Such plans usually limit the num-
ber of stores in proportion to population. A city may
take an inventory of its retail businesses and find the
number of each type in each locality. Prospective mer-
chants may then be advised by city officials or bankers
which localities to enter and which not to enter.
The wholesalers could do much to remedy the situa-
tion by refusing credit to people who have insufficient
capital and who obviously lack experience or the train-
ing that fits them for success.
Examinations. — Another proposal is that people be
required to pass examinations before they are given li-
censes to enter business. Many states have examinations
for men who want to be lawyers, doctors, accountants,
barbers, plumbers, electricians, druggists, or underwrit-
ers. Applicants could secure the information necessary
for the examinations in schools and by experience. As
licenses would be granted to all who passed the examina-
tions, the proposal is not opposed to freedom of oppor-
tunity, as at present understood. The examinations
might cover the principles of merchandising (including
salesmanship, advertising, and bookkeeping) and a
knowledge of the goods to be handled.
There is, of course, something to be said for allowing
people without special training or who are not physically-
able to do strenuous work to start small retail establish-
ments, such as news stands, lunch counters, or small
neighborhood stores, in order to keep them from being
unemployed or becoming public charges. This is espe-
cially true in times of business depression. However,
considering all angles of the problem, it seems that only
a limited number of persons should start such businesses
of their own.
Profits 445
Chapter 26
Review Questions
1. What is profit?
2. What is the difference between the bookkeeper's and
the economist's definition of profit?
3. According to the economist's definition, are there any
profits under free competition?
4. What objection is raised to putting salaries for the
owners of the business into expenses?
5. What are the two bases of computing profits?
6. Why do profits vary widely between competing mer-
chants?
7. What is the object of business?
8. How is business success measured?
9. Give two definitions of business failure.
10. What is meant by business mortality or turnover?
11. What are the facts about business mortality as found
in various studies?
12. Has the rate of business mortality changed during the
past 40 years?
13. Is business mortality higher in large or small cities?
14. Why do merchants quit business?
15. What are the principal causes of business failure?
16. Why do so many incompetent people enter business?
17. Does the high rate of business mortality, or dealer
turnover, benefit the consumers? Reasons?
18. Name proposed remedies for the high rate of business
mortality.
19. Which of these remedies do you favor? Why?
Thought Problems
1. Do all the merchants quitting business fail?
2. It has been said that a business man does not earn a
446 Profits
profit until he has allowed for depreciation on his assets,
paid himself a salary, and earned six per cent on his invested
capital. Comment.
3. What do you think of the proposed examinations for
new dealers? It has been said that such examinations are
opposed to the idea of a free opportunity for all. What do
you think of this statement?
4. What should the proposed examinations for dealers
include (assuming that they are to be required)? Make
out a set of questions for prospective retail grocers or some
other type of retailers.
5. Why is the rate of mortality among new dealers highest
during their first years in business?
CHAPTER 27
Principles of Salesmanship
Salesmanship defined. — Salesmanship may be defined
as the art of persuading people to purchase goods or
services. The buyers do not, in most instances, want
the goods themselves but rather the satisfaction which
the goods or services give. The salesman, thus, sells
the hope and expectation of pleasure or profit. The
customers are interested in what use they can make of
the goods, or what the goods will do for them. To il-
lustrate, the ordinary person is primarily interested in
the pleasure and use he gets from an automobile. He
cares more about its appearance, speed, riding ease, de-
pendability, and safety than in the kind of steel, gears,
axles, sparkplugs, springs, and bearings that are in it.
Salesmanship is often thought of in a somewhat
broader way. Thus "salesmanship is the art of winning
willing cooperation." This definition broadens the
meaning to include winning cooperation for every pur-
pose. The clergyman, the teacher, the lawyer, the fore-
man, the executive, and everyone else in a position of
leadership should master the art of "salesmanship" in
this broad sense. In this chapter, however, the term
will be limited to inducing people to buy goods or serv-
ices.
Salesmanship is often used to include both personal
and impersonal methods of selling. When defined thus
it is divided into personal salesmanship, advertising, and
publicity. As used in this and the three following chap-
448 Principles of Salesmanship
ters, "salesmanship" refers to personal salesmanship,
Steps in a sale. — There are four steps in making a sale.
The first is securing attention. If the salesman cannot
get the prospect's attention, he has no chance of arous-
ing his desire. The second is , securing interest. The
prospect must become interested in a product in order
to learn enough about it to want it. The third step is
arousing desire. People must want things before they
will buy them. The fourth step is securing action. No
matter how badly a person wants a thing, the sale is not
made until he buys it. He may have the desire and yet
not purchase because he wants something else more or
because he lacks money. Not only must the salesman
make people want things but he must make them want
his product more than they want other things.
Salesmanship vs. order-taking. — Salesmanship is mak-
ing people want a product and then selling it to them.
Order-talking is simply handing out the goods or writing
orders for goods which people already want. The clerk
who fills the order, or the traveling man who asks the
dealer what is on his want list and writes down these
items on his order blank, is an order-taker. However,
if he presents goods which the customer had not in-
tended buying in such a way that the customer's desire
is aroused and he buys them, then he is a salesman. The
number of people who can take orders is very large.
Consequently their pay is low. On the other hand, the
number of people who can arouse desire and secure
action is relatively small, and consequently their pay is
very much higher than that of the order-takers. In
practice, the term "salesmanship" is often used to in-
clude both real salesmanship and order-taking. The
reader, however, should remember the distinction.
Principles of Salesmanship 449
Necessity for salesmanship. — Salesmanship is neces-
sary under the present economic system because the
productive capacity of our factories, mines, and farms
is larger than the purchasing power of the consumers.
This condition was brought about by the industrial revo-
lution and has been particularly noticeable during the
past fifty years. It makes what we call a "buyer's mar-
ket," by which is meant that there are many sellers
trying to sell every buyer. The buyers are therefore
more or less autocrats who bestow their patronage upon
the seller who best meets their needs.
Salesmen have introduced many new products which
add to the consumer's comfort and to business effi-
ciency. Cooking stoves, electric refrigerators, kitchen
cabinets, washing machines, electric irons, aluminum
cooking utensils, vacuum cleaners, cash registers, type-
writers, adding machines, and air-conditioning equip-
ment are examples. The demand for nearly all new
products must be developed.
Types of salesmen. — Salesmen may be classified as
wholesale, retail, and specialty. Wholesale salesmen
represent manufacturers or wholesalers and sell to other
business men — manufacturers, wholesalers, retailers, in-
stitutions, public utilities — and not to the ultimate con-
sumers. Most of them are traveling salesmen and call
upon their customers at their places of business.
Retail salesmen sell at retail and usually work in re-
tail stores where the customers visit them.
The specialty salesman has only one line to sell, and
he sells only one article or a very few products. He
specializes on this, devotes his entire time to it, and so
should have an expert knowledge of it. He often sells
a new or distinctive product, or a product which en-
450 Principles of Salesmanship
counters much sales resistance. This means that his
task is difficult and that it requires real ability and ef-
fort to succeed. Many of the best salesmen are specialty
men. They are found selling such products as insurance,
books, bonds, machinery, and new devices of all kinds.
Some call upon only business concerns and others call
upon only the consumers, but many call upon all classes
of prospects. They may represent any type of seller,
but relatively few are employed by wholesale and retail
merchants.
The principles of salesmanship laid down in this chap-
ter apply to all types of salesmen, but we shall have in
mind particularly specialty and wholesale men. Retail
salesmanship will be discussed more fully in Chapter 29.
Buying motives. — The salesman deals with people.
Since his purpose is to influence people, he should un-
derstand human nature. A knowledge of buying motives
(the reasons why people make purchases) is fundamen-
tal to successful salesmanship.
Many lists of buying motives have been prepared.
Some classifications include only the fundamental mo-
tives, or bases, of human action, such as desire for food
and bodily comfort, affection, pride, fear, imitation, awe
of the Divine, desire for money, and desire to acquire
things. Others include long lists of the specific reasons
causing people to make purchases. For our purposes
we shall list the above fundamental motives with a few
of their more important subdivisions.
BUYING MOTIVES
Desire for food.
Desire for bodily comfort, health, protection from the
weather as given by houses and clothing, leisure,
and cleanliness.
Principles of Salesmanship 451
Affection — love of the opposite sex, of family, of
friends; and the desire to make them happy.
Pride, desire for the praise and admiration of others,
desire to excel, desire for ornaments, education,
etc.
Profit or desire for gain or economy. Most pur-
chases made by business men are made in the hope
of a profit.
Fear, caution, desire for safety.
Imitation, desire to be like others and have what
they have — to be in fashion.
Worship; love, and awe of the Divine.
Constructiveness, desire to make things.
Curiosity, desire for knowledge, education, travel.
Desire for justice and fair play.
Amusement, desire for entertainment and recreation.
Acquisitiveness — desire to own things.
The salesman must appeal to these motives in making
sales. Some of them are more important than others.
Their importance varies with different buyers. The
salesman must study his prospects and select the motives
that are best adapted to each of them. One man is very
fond of his children and can be reached best through an
appeal to his affections. Another is vain. The salesman
may appeal to his pride. Another likes money and can
be successfully reached by being shown how he can make
a profit.
The sale analyzed. — The steps in making a sale are:
The preapproach.
Securing the interview.
The approach, securing attention.
The sales talk, securing interest, desire, and action.
The departure.
The oreaDDroach. — The Dreannroach is the work that
452 Principles of Salesmanship
should adapt his talk to the needs and characteristics
of the prospects. He cannot ordinarily learn enough
about the buyer's needs and personality during the in-
terview. He should, therefore, learn something about
the buyer and his needs, and should plan his sales talk
before he makes a call.
A life insurance salesman should find out something
about his prospect's income, age, family, and property
before he calls. He can then present a definite plan of
protection and saving to meet his prospect's needs. Sup-
pose he finds a prospect with a good income, limited in-
vestments, and a wife and young children. He can then
suggest a plan which will provide an adequate income
for the wife during her lifetime and for the children un-
til they are grown and educated. If a prospect has young
children, the salesman selling such products as books,
musical instruments, or automobiles can appeal to the
man's affection by showing how his product will benefit
the children. If a prospect is found who likes praise and
admiration, the salesman shows how his product will
secure the praise of the prospect's friends. If the sales-
man discovers that a prospect is very ambitious to make
oioney, he can appeal to his desire for gain.
There are many sources of information open to the
salesman. He may consult directories to find a pros-
pect's occupation or business, financial rating, and resi-
dence. Credit bureaus will often furnish information as
to character, employment, occupation, and present and
former addresses. Information may be obtained from
hotel clerks, other salesmen, other business men, banks,
news in local papers, advertisements of the prospect, and
the employees, neighbors, or friends of the prospect.
Time and tact may be required to gather the informa-
tion, and it is generally better to spend a reasonable
Principles of Salesmanship 453
amount of time in securing information about one's
prospects than to make "cold" calls.
Securing interviews. — The salesman cannot arouse the
buyer's desire unless he has an opportunity to talk to
him. No matter how much he knows about his product
or about the buyer's needs and characteristics, he cannot
make sales without interviews. A great many interviews
are obtained easily. Some buyers, however, may not
want the salesman's goods; if they did, salesmen would
be unnecessary, and order-takers could do the work.
Or, the buyers may be busy and not have time to see
all the salesmen who call upon them.
If the salesman has made a proper preapproach, he
knows whom he wants to see, and he can thus ask for
his prospect by name. This increases his chances of se-
curing an interview. A good appearance creates a good
impression and helps secure the interview. The sales-
man should act as if his business were important,
and he should ask for the interview confidently, as if it
were expected. If the buyer is busy, the salesman should
offer to wait or to call again at a later time. Perse-
verance wins many interviews. Friendly relations with
secretaries and employees in the outside office are very
helpful, for they can often make appointments and give
information as to the best time to call and the mood of
the prospect. The salesman may write on his card that
he has seen or sold certain acquaintances of the buyer.
If he has sold their competitors, they are very likely to
see him. The salesman may at times secure the buyer's
interest by sending in a sample of his product by the
office boy. Often the buyer's interest is aroused by let-
ters or advertisements sent to him in advance of the
talesman's call.
Thp sfl.lpsmfln rrmv rrmkp advano.p RrmointmpntK hv
454 Principles of Salesmanship
telephone or letter. At times he secures an introductory
letter from a friend or has a mutual friend make an ap-
pointment. In extreme cases the salesman may walk
into the buyer's office unannounced or may secure en-
trance by strategy. When entrance is secured in such
ways, the salesman is at a disadvantage, but he may feel
sure that he has something that will interest the buyer.
The salesman for a patented device may follow the of-
fice boy into the buyer's private office and place the
product on his desk. As the product is new, the buyer
knows nothing about it and is not interested until he
sees it; but then he is frequently interested, and many
sales can be expected if the product meets a genuine
need.
The approach. — The purpose of the approach is to
secure the buyer's attention. The salesman should have
a good appearance, for the buyer often judges him by
his first impression. If possible the salesman should
approach the buyer when he is in a receptive mood.
There are several methods of approach. The sales-
man using the direct method gives the name of the com-
pany, usually his own name, and then starts in to
explain his product.
Sometimes the salesman tries to secure attention by
curiosity. For example, he may say that he has a plan
whereby the buyer may secure financial independence
for his old age. This naturally arouses the curiosity of
the buyer and secures his attention.
Enthusiasm may be used to secure attention. If the
salesman is enthusiastic about the product, the buyer
is inclined to think that it is worth looking at.
A demonstration often makes an excellent approach,
for it shows the buyer what the salesman is talking
Principles of Salesmanship 455
about. We learn much more quickly through the eye
than through the ear. The salesman mentioned above
who placed his product on the buyer's desk and began
to explain its operation used the demonstration method.
Salesmen can often place a sample in front of the buyer
before they begin to talk. The salesman for a check
writer may set his machine down and turn out a speci-
men check before he begins his talk. Sometimes the
demonstration approach is dramatic; thus a glassware
salesman may roll a sample along the floor as he enters
to show that it is not easily broken.
The hobby approach. — The hobby approach consists in
starting to talk about the buyer's hobby. The salesman
sees a large framed trout in the buyer's office and asks
about where the fish was caught. This starts a conver-
sation about fishing and may establish friendly relations
between the buyer and the salesman. A salesman no-
ticed in the paper that the son of a prospect had won a
very difficult sail boat race. Knowing something about
boating, the salesman started the conversation by com-
plimenting the prospect on the success of his son. The
father was very proud of his son and a very interesting
conversation ensued, and the salesman got the buyer in
a very favorable attitude before he began his sales talk.
The hobby approach -can be used successfully, but it
must be well done to be effective. The salesman must
know enough to talk about the hobby intelligently, and
the buyer must have time for the conversation. The
salesman who must tell his story in a few minutes can-
not talk about hobbies. Buyers are often too busy to
talk hobbies during business hours. Suppose a buyer
is interested in baseball and twenty salesmen call upon
him daily. If each salesman tries to talk baseball, the
456 Principles of Salesmanship
subject gets very tiresome. The buyer's reaction is un-
favorable, and the salesman who uses this method in a
casual way lessens his chances of making a sale.
Securing undivided attention. — The buyer will often
admit the salesman and continue with other work, ex-
pecting to divide his time between two things. The
salesman should not begin his talk under such circum-
stances. If a demonstration cannot be used to secure
full attention, the salesman should wait. Often it is
a question of perseverance as to which will wait the
longer, the buyer or the salesman. To force the issue
the salesman may offer to return at another time when
the buyer is less busy.
Chapter 27
Review Questions
1. What is salesmanship?
2. What steps are involved in making a sale?
3. What is the difference between salesmanship and order-
taking?
4. Is salesmanship necessary? Why, or why not?
5. What are the different types of salesmen?
6. Name the important buying motives.
7. What use should the salesman make of buying motives?
8. What are the different steps in making a sale?
9. What is meant by the preapproach? What can you
say of its importance?
10. What sources of information can a salesman use in
securing advance information about his prospects?
11. How may the salesman secure difficult interviews?
12. What is meant by the approach? What is its purpose?
13. What is meant by a demonstration approach?
Principles of Salesmanship 457
14. What is meant by a hobby approach? What do you
think of this type of approach?
15. What should the salesman do when the buyer tells
him to go ahead with his sales talk while he goes ahead
with other matters?
Thought Problems
1. How many people do you know who have everything
they want that can be purchased with money? Does the
answer to this question throw any light on the need for
salesmanship?
2. Give as many meanings as you can of "salesmanship."
3. How may a life insurance salesman find out about a
prospect's income, age, family, and amount of insurance be-
fore he calls upon him?
CHAPTER 28
The Sales Talk
As soon as the salesman has secured the buyer's at-
tention, he starts in to explain his product — to deliver
his sales talk. In order to make a sale, he must get the
buyer interested, arouse his desire for the product, and
induce the buyer to make a purchase.
Securing interest. — The buyer is primarily interested
in himself, his business, and his family. The salesman
should talk from the buyer's viewpoint. .He should
show what his product will do for the buyer. He should
place more emphasis on the use of his product by the
prospect than on the product itself. This is known as
the "you" attitude. This attitude is a fundamental of
good salesmanship.
Questions are often an effective way of securing inter-
est. The salesman asks, "How much does your coal
cost?" This concentrates the buyer's mind on the sub-
ject of fuel and very likely arouses his curiosity to know
whether the salesman has a plan for reducing this cost.
The salesman should appeal to the buying motives
that he feels are best adapted to his prospect and his
product. To do this he must know something about his
prospect, or must "size him up" during the interview.
Many buyers can be reached through an appeal to profit
— the main appeal in the sale of goods to business con-
cerns. The salesman should tell how his product will
increase the buyer's sales or will add to his profit. If
the salesman has a machine that saves labor, he points
458
The Sales Talk 459
out the saving. If the machine is strongly built, he
points out its durability and the small cost for repairs.
He shows how it is real economy to buy a superior prod-
uct.
Affection is a strong motive with most buyers and can
be utilized by salesmen selling products to be used by
the buyer's family. The washing machine salesman
tells how the product will save the wife much hard toil.
The radio salesman tells how much enjoyment the family
will secure from the radio.
Many buyers can be reached through pride. The
salesman for an expensive automobile points out how
much pleasure is obtained from owning and riding in
such a fine car. "And besides, the depreciation and re-
pairs are so much less on a really good car than on a
cheap car." Thus the salesman brings in economy and
makes two appeals.
Arousing desire. — The salesman wants to develop in-
terest into desire. The change often takes place so
gradually that neither the buyer nor the salesman know
exactly when it occurs. The salesman should appeal to
as many motives as possible. He needs to know his
product and its uses thoroughly so that he can fully
explain it to the prospect. He must arouse confidence
in his product; this may be done by demonstrations, by
showing testimonials, by giving the names and experi-
ences of satisfied users, or by telling about the quality of
raw materials and workmanship employed in its pro-
duction. To establish confidence in his firm, he can tell
about its age, size, and reliability. Enthusiasm and sin-
cerity will do much to gain confidence.
Demonstrations should be used whenever possible.
The salesman must appeal to as many of our senses as
nossihlp. When he talks, hp onlv HSPS thp SPTISP of
460 The Sales Talk
ing. If he can show his product, he uses the sense of
sight, and most people learn much more quickly by sight
than by hearing. If he puts the product in the buyer's
hands, or gets him to try it on, he appeals to the sense
of touch ; and in the sale of foods he can appeal to the
sense of taste. The sense of smell can be used less than
the other four senses, but it may be used in the sale of
such goods as perfumes, soaps, flowers, and foods.
The salesman should be very careful not to make
negative suggestions or to ask questions suggesting nega-
tive answers. Positive suggestions and questions should
be used. For instance, "Isn't that pretty ?" "Doesn't
that fit in with your present equipment?"
Meeting objections. — The buyer often has objections
which must be answered before he will buy. The sales-
man should anticipate as many of these objections as
possible in his sales talk. To illustrate, if a salesman
is selling an automatic water heater, he can point out
during his sales talk that its greater convenience more
than compensates for the little extra cost of its opera-
tion. If a common objection to his product is its high
price, he should give such a convincing talk on its quality
and advantages that the buyer will think it well worth
its price.
The salesman should be able to answer the objections
raised by the prospects. If the prospects say that they
cannot afford the product, the salesman may reply that
they cannot afford to do without it and proceed to show
the savings or the extra profit derived from its use. He
may say that the article can be bought on credit with
easy payments. If the prospect means that he cannot
afford it because he prefers to spend his money for other
things, the salesman tries to show that, after all, more
satisfaction is obtained from his product. For example,
The Sales Talk 461
the prospect objects to the price of a high quality mat-
tress. The salesman replies that the average person
spends one-third of his life in bed. "When such a large
part of your time is spent in bed, shouldn't you have the
most comfortable mattress?"
If an objection is made to the quality or design of the
product, the salesman should admit any defects but
show the superiorities of his product. If the prospect
objects to a washing machine because there is no apron
to guard the motor, the salesman admits the lack of an
apron but points out that the apron was left off to
lighten the machine and make it easier for the woman
to move. He goes on to say that the guard is little or no
protection. Thousands of tests have shown that the
motor is absolutely safe. Besides if the motor should
short circuit, a metal apron would afford no protection.
If the dealer says that business is bad, the salesman
points out that the dealer cannot expect to keep up his
sales with incomplete stocks. This objection often re-
flects the pessimism of the buyer. The salesman may
try to dispel this by naming other customers whose
business is good. If the dealer says that he is all stocked
up, the salesman may ask permission to examine the
shelves to see if the stock of some sizes, styles, or grades
is low. If so, the salesman points out what additional
stock is needed. If the dealer's line is complete, the
salesman may say that the dealer can add an additional
line, or that his product sells faster or carries better profit
than those now handled. He may ask for a trial order.
If these requests are denied, the salesman may try for
an order for future delivery, or try to establish friendly
relations as a basis for future sales. The salesman
should be careful not to oversell the dealer. The ad-
vantages of a rapid rate of turnover have been previ-
462 The Sales Talk
ously explained. If the salesman sells the dealer goods
which do not move, he is injuring the dealer and creat-
ing ill will for his company and himself. On the other
hand, a dealer with a small stock of an article will not
push its sale as much as he will when he has a large
stock.
The salesman should study all of the objections which
he meets and secure answers to all that can be answered.
No product is perfect, and where valid objections exist
the salesman should frankly admit them but also tell
of the compensating advantages.
Action. — The close is ordinarily considered the most
difficult part of salesmanship. The proper time, or the
psychological moment, to close is when the prospect is
ready to buy. The salesman can lead up to the close
and, if the prospect is not convinced, continue with his
talk, giving additional information, covering new points,
answering objections, and reassuring the buyer. The
salesman should assume that the prospect is going to buy
and should act on this assumption. He should not sug-
gest by any word or action that the buyer is not going
to make a purchase.
Close on a minor point. — The salesman may shift the
decision to a minor point. The clothing salesman, when
he feels that the customer has almost reached a decision,
starts to take his measurement. He asks if the coat
sleeve is the proper length. He thus takes it for granted
that the customer is going to buy the suit. The cus-
tomer has his mind shifted from the question of whether
or not to buy to the question of the proper length of the
sleeve. Thousands of suits have been bought on the
length of the sleeve or the fit of the coat. If the sales-
man has different colors, styles, or finishes of his product,
he may shift the decision to such matters.
The Sales Talk 463
The specialty salesman often says: "I have two de-
liveries, one on the 15th of April and the other on the
2nd of May. Which time would be more convenient for
you?" The buyer is undecided about making the pur-
chase and is trying hard to make a decision. The
salesman shifts her decision to another matter. She
probably replies: "If I am going to have it, I want it as
soon as I can get it." Or, "You had better bring it in
May; we shall be more likely to have the money then."
The signed order. — If a signed order is required, the
salesman should proceed to fill it out as a matter of
course. He should not suggest by any word or action
that there is anything unusual about signing an order.
He should act as if it were merely a part of the day's
business and were done by all buyers in the regular course
of business. When the order is filled out, the salesman
should place it before the buyer and hand him the pen.
Very often no word is needed. Often it is well to call
the buyer's attention to the fact that certain terms, de-
livery dates, prices or discounts are written as agreed.
If the buyer objects to signing the order, the salesman
may ask him to read it and explain that a written order
protects both parties. He may also explain that it is
the regular thing. Some salesmen say that it is only
a required formality and means nothing. This is often
untrue. If it means nothing, why is it required?
The departure. — After the sale is closed, the salesman
should leave quickly and gracefully. The buyer has
given the order and has other matters to attend to. The
salesman should not take up any more of his time. The
salesman should pack his samples or catalogs quickly
and deftly. If the buyer is watching, he should make
some friendly remark about the weather, a current news
item, or a topic of previous conversation. He may also
464 The Sales Talk
make a reassuring statement about the goods, as "I
know you are going to enjoy your purchase." The main
thing, however, is to get away quickly without appearing
to be in a hurry.
Types of buyers. — There are many kinds of buyers.
Nevertheless certain general types may be recognized.
Some of the more important types, with suggestions of
how they should be handled, are given below.
The cold, critical buyer. The salesman should
keep his "nerve," or self-confidence, and give a very
business-like sales talk full of facts. He should be
careful not to talk too much, not to make broad and
sweeping statements, and not to overstate the merits
of the product.
The self-important buyer or egoist. The salesman
should flatter this type.
The easygoing and good-natured buyer. The
salesman should establish friendly relations. The
salesman likes to meet this type but should not expect
sales to come too easily. Sales are often lost because
the salesman thinks the sale is assured and so does
not put forth his best effort. Some buyers adopt this
attitude to throw the salesman off his guard.
The nervous and irritable buyer. The salesman
should be calm and polite.
The forgetful buyer, or the type that has difficulty
in concentrating and reaching decisions. The sales-
man must go slowly and repeat often. He should
help the buyer to decide and should narrow the
choice as rapidly as practicable to make the buyer's
decision easier. Salesman must arouse confidence.
This may be done by testimonials or by naming
users, as such buyers may imitate people in whom
they have confidence.
The opinionated buyer who has strong opinions on
politics, religiop, business conditions, economic re-
form, etc. Such people are likely to be very talka-
tive. The salesman should keep on the subject and
The Sales Talk 465
direct the buyer's mind to his product. The salesman
should not disagree, but this does not mean that the
salesman should lie by saying that he agrees when
this is not the case. If the salesman has time, he
may win their friendship by being a "good listener."
The impolite buyer. The impolite buyer may
belong to almost any of the above groups except the
easygoing, good-natured group. Under the present
economic condition which produces a buyer's market,
the buyers can be most unreasonable and disagree-
able. The salesman should ordinarily keep his
temper and politeness, no matter how impolite the
buyer becomes. If the buyer goes so far as to lose
his temper, this gives the salesman the advantage.1
Cultivated and rough buyers. Many sellers recog-
nize two types of customers and employ different
types of men to reach each class. The salesman sell-
ing the educated or cultivated buyers must be better
dressed, have better manners, and use better language
than the salesmen selling to the "rough-neck" class.
Constructing the sales talk. — Many companies con-
struct sales talks for the use of their men. These are
helpful, although sometimes the salesmen must change
them somewhat to suit their personalities and sales
methods. If the company does not provide sales talks,
the salesmen should develop one or more to suit their
needs. Some companies recommend the use of memo-
rized sales talks by their salesmen. Such talks are better
than no organized talks. The memorized talk, however,
is dangerous in that it is not adapted to all prospects
and is likely to become mechanical or parrot-like.
The sales talk should be flexible, so that it can be
adapted to different buyers and to different situations.
It is often well to have several talks to suit different situ-
1 In very extreme cases, where the buyer is a bully, the salesman
may win his respect and business by "calling his bluff" and showing his
resentment emphatically.
466 The Sales Talk
ations. Thus the life insurance salesman may have talks
for young unmarried men, for young married men, for
men with children, for middle aged men who are begin-
ning to think of old age and retirement, for business
and professional women, for students, and so on. The
wholesale salesman may have talks for rural dealers who
are losing business to the trading centers, and for dealers
in the large cities who are faced with competition from
the chain and department stores.
The sales talk should be based on the needs of the
buyers, on human nature, and on a thorough knowledge
of the product. A habit talk is usually better than a
memorized talk. A habit talk is one that is carefully
worked out and is given in approximately the same way
every time, but is not memorized and repeated word for
word. The talk should be conversational in nature and
should be suited to the individuality of the salesman.
One salesman may use a method successfully, while an-
other would fail if he used it. For example, one man
may be able to establish friendly relations very quickly
and to be very frank and confidential in his conversa-
tion with his prospects. Another salesman, who perhaps
is dignified and arouses confidence by his dignity and
self-assurance, might arouse the resentment of his pros-
pects by using the first salesman's method. A third
man may make sales because of his thorough knowledge
and love of his products. The same basic talk may be
used by these three men, but each should adapt the talk
to his method of selling. One method of securing good
sales talks is to have the best men in the organization
give their talks. These are written down, revised, and
modified, and given to the other men.
Value of sales talks. — It has been proved that trained
salesmen produce much better results than untrained
The Sales Talk 467
men. Sales training usually includes a careful study of
one or more sales talks. An insurance company pre-
pares sales talks for its salesmen, but these talks are not
required. Some of the men use them and some do not.
During a recent year, the new men who used the pre-
pared sales talks sold an average of 66 per cent more
insurance than the new men who did not use the pre-
pared talks. During their second year, the men who used
the sales talks sold on the average of 114 per cent more
insurance than the men who did not use the sales talks.
Chapter 28
Review Questions
1. How may the salesman secure interest?
2. How may the salesman arouse desire?
3. What are meant by objections?
4. Name some typical objections, with your answers to
them.
5. What is meant by the close? How should the sales-
man go about closing a sale?
6. What is meant by a close on a minor point?
7. How should the salesman make his departure?
8. How should the salesmen proceed with the close when
a signed order is required?
9. Name seven types of buyers.
10. How should each type be handled?
11. What is meant by a sales talk?
12. What do you think of a memorized sales talk?
13. How does a habit talk differ from a memorized talk?
14. What is meant by a flexible sales talk?
15. How should the sales talk be adapted to different
types of buyers?
468 The Sales Talk
Thought Problems
1. Select some article or service and prepare a sales talk
to be used in selling it.
2. How many types of buyers can you name in addition
to those listed in this chapter?
3. Some sales executives say that most of the so-called
"objections" are not objections at all but only excuses used
because the prospect doesn't really want the product or
because he doesn't want to tell his real objection. Do you
agree with this point of view? If so, how can the salesman
find the real objection?
CHAPTER 29
Retail Salesmanship
Problems in retail selling. — The same principles apply
to retail salesmanship as to other kinds of salesmanship.
The buyer must have her attention centered on the
goods, must become interested in them, must have her
desire aroused to own them, and must reach a decision
and make the purchase. There is, however, one impor-
tant difference between retail selling done in the stores
and other forms of selling. This is the fact that the
buyers come to the salesman. The customers may be
attracted to the store by the display of goods in the
window, by the store's advertisements, by satisfactory
relations in the past, by friendly relations with the sales-
people, or by the convenient location of the store.
The fact that the customers come into the store volun-
tarily makes the work of the retail salesperson different
in some important respects from that of the traveling
salesman. The prospect usually enters the store because
she is interested in certain merchandise. The sales-
person therefore has no problem in securing an interview,
in attracting attention, or in arousing interest. He
must concentrate on arousing desire and closing the sale.
In many cases the customer knows exactly what she
wants before she enters the store. All the salesman has
to do is to find and wrap the goods and make change,
or fill out a sales ticket. In such cases he is an order-
taker. In making such sales, most of his work consists
of handling the goods themselves, making out sales slips,
469
470 Retail Salesmanship
or making change. This is not "selling," except in a
legal sense. This explains why retail salespeople are
sometimes called clerks. There is, however, an oppor-
tunity for real salesmanship in retail stores.
The preapproach. — The retail salesman does not ordi-
narily make a preapproach before trying to sell a pros-
pect, for he does not ordinarily know tin advance who is
coming into the store. Hence it is very important that
he size up the new customers on meeting them. The
retail salesman, however, should know his regular cus-
tomers, should remember their names and faces, and call
them by name. He should know their needs, tastes, de-
sires, approximate income, and the sizes of their families
or their family relations. It makes a very favorable
impression on his customers if he remembers the kind,
style, or color of goods they like. Does the customer
want loud or conservative patterns and what are her
favorite colors? The retailer of clothing, for example,
may keep a card record of the sizes, patterns, colors, and
styles preferred by each customer. The salesman can
look at the file and avoid having to ask for sizes and can
usually show at once the proper kind of goods.
Some customers want to be flattered. Some are in-
dependent, and others want advice and help in making
selections. Some want the very highest quality, while
others are bargain hunters and want to be told how
much money they are saving on their purchases. The
salesman should remember the personal likes and dis-
likes of his customers. For example, the meat sales-
man may remember that Mrs. Jones wants the very
best steak and likes it cut 1*4 inches thick, while Mrs.
Smith wants a medium quality and likes it cut thin.
The salesman who remembers such things pleases his
customers, gives them better service, and sells them
Retail Salesmanship 471
more quickly than the salesman who does not have this
information.
The approach. — The salesman should approach the
customer as soon as she enters his store or department,
or as soon as he is free. He should go to meet the cus-
tomer. This shows interest. A frequent criticism of
retail salespeople is that they are not interested in the
customers. Too often they are talking to each other,
or are loafing, and are too lazy or indifferent to approach
the customer promptly.
The salesman should greet the customer pleasantly.
It does not make so much difference what he says as
how he says it. The salesman may say, "Good morn-
ing/' "May I help you?", or "May I be of service?" If
he recognizes the customer, he may say, "Good afternoon,
Mrs. Smith, may I help you?" Or he may say, "Good
morning, Mr. Jones," and wait in a manner that indi-
cates that he is at Mr. Jones' service. Sometimes the
salesman creates a favorable impression without saying
a word. He approaches the customer and by his pleas-
ant expression and his actions announces that he is ready
and glad to serve her.
If the customer is "just looking around," the salesman
should ordinarily remain in the background — far enough
away to leave the customer entirely free but near enough
to be ready to answer questions or find goods as soon
as she indicates by actions or words that she wants help.
The size-up. — The size-up is very important. Differ-
ent types of customers should be handled differently.
If the salespeople could only know what was in the
minds of their customers, they could sell more goods and
avoid much criticism. If the salesman knew, for ex-
ample, that the customer was feeling pretty prosperous
and wanted the best, he would not start out by showing
•472 Retail Salesmanship
cheap goods. On the other hand, if he knew the cus-
tomer was feeling very poor and wanted to exercise the
strictest economy, he would not try to talk her into buy-
ing high-priced goods.
The same customer enters the same store in different
moods. At one time she is in a big hurry. She wants
a certain article and wants to get it as quickly as pos-
sible. At another time she does not have a definite ar-
ticle in mind and wants to be shown different articles.
Again, she may be just looking around in the hope of
finding something for a gift. She needs to be handled
differently on each occasion.
In order to size up the prospect, the salesman should
observe her facial expression and how this expression
changes with the presentation of different merchandise
and with different suggestions. The salesman should
observe the prospect's entrance. Does she seem to be
in a hurry or does she enter leisurely? Is her step un-
decided? By observing the prospect's step, facial ex-
pression, bearing, voice, and dress, he may be able to
sell her more satisfactorily and more quickly.
The interview. — The saleman's first problem is to find
the customer's interest. If she does not give this infor-
mation, the salesman may ask questions. If the article
is carried in a number of sizes, grades, brands, colors,
or styles, the salesman may ask questions to find more
exactly what the customer wants. Thus he may ask,
"Size 32?" or, "Do you prefer a dark or light color?"
The salesman, however, should not narrow the choice
too much. For example, the "salesman" asks the size
of the hat and finds that the prospect wears a 7%, then
asks for the color and finds that the prospect prefers a
dark gray, and then discovers that he does not have a
dark gray hat in stock. He has placed himself at
Retail Salesmanship 473
a disadvantage. Perhaps the buyer had no definite pref-
erence and would have just as readily taken a light gray
or a brown, if the salesman had not forced him to ex-
press a preference. However, he has gone on record as
wanting a dark gray. The salesman must lose the sale
or persuade the customer to take another color.
A distinction may be made between convenience and
shopping goods. The customer usually knows what she
wants when she enters a store to buy convenience goods.
She generally asks for the product by brand, by size,
or by color. It is usually best for the salesman to hand
out the goods desired at once, although he may also offer
substitutes. With shopping goods, the matter is dif-
ferent. The customer usually does not know exactly
what she wants. She usually wants to look over a va-
riety of goods and make a selection. The salesman
should not ask too many questions before he begins to
display his wares. He should watch the customer and
take away promptly the goods in which she is not inter-
ested. He can determine her preferences as to color,
style, and price by the way she examines the goods and
by her remarks. When she cannot make up her mind,
the salesman may concentrate his efforts on the article
which he feels is best suited to the buyer or to the article
that he feels that she really prefers. He talks about the
advantages of the article, how it will serve her needs, and
how much satisfaction, service, and pleasure it will give.
Selling to two people. — At times the salesman must
sell to two or more people. This is usually more diffi-
cult than selling to one person. Man and wife may shop
together, or the customer may bring a friend. The
salesman needs an unusual amount of patience and tact
when two people must be sold. At times he must show
goods until he finds something that both like. At other
474 Retail Salesmanship
times he tries to determine which person dominates the
purchase and concentrates on her — without appearing
to ignore the other. When he finds which article the
dominant person prefers, he tries to secure the approval
of the other by pointing out its good points and asking
questions that suggest affirmative answers. To illus-
trate, "That's a beautiful color, isn't it? Doesn't that
harmonize nicely with your furniture?"
Substitution. — It often happens that the desired arti-
cle is not in stock. The salesman may then offer a sub-
stitute or offer to order the article for the customer. He
should not offer a substitute as the desired article, but
he may indicate that it is of equal or better quality.
He should not push the substitute unless the buyer is
interested. If she is interested, however, he should pro-
ceed with the sale just as if the article had been re-
quested in the first place. At times the salesman may
feel that another article would meet the buyer's needs
better than the one requested; or he may prefer to sell
a substitute article because it carries a larger margin or
because he has an overstock. In such cases he should
first show the article asked for. He may then say, "Here
is another article which I believe you will like better,"
or "Here is a better value." In no case should a substi-
tute be forced on the buyer. Neither should a substitute
be offered unless it is adapted to the buyer's needs.
Creating desire. — Creating desire is the most impor-
tant part of selling. It is in this aspect of selling that
retail salespeople are weakest. It is more difficult for
them to create desire than for wholesale and specialty
salesmen, because retail salesmen cannot use "high pres-
sure" methods or force sales. If they do, they are in
danger of antagonizing their customers.
The weakness of retail selling is illustrated by the
Retail Salesmanship 475
figures in Table 44 which show the ratings of salespeople
made by their customers. The salespeople were rated
on five qualities: their personal appearance; their ap-
proach; their interest in the customer, in the merchan-
dise, and in the store; their knowledge of the goods —
uses, qualities, colors, and styles; and their ability to
create desire. It will be seen that these salespeople had
TABLE 44.— RATING OF 106 RETAIL SALESPEOPLE
RATING OF SALESPEOPLE
Quality Rated Good Fair Poor
Appearance 58 29 19
Approach 53 24 29
Interest in customer and goods* . . 47 31 27
Knowledge of goods 59 27 20
Creation of desire 24 30 52
*One salesperson not rated on this factor.
the best rating on their appearance and on their knowl-
edge of the goods. One-half of the salespeople had a
"good" rating on these factors, and only one-fifth had a
"poor" rating. The approach of these salespeople was
not quite so good. Their interest in the customers and
in their work was quite a bit poorer. In, their ability to
create desire they ranked very low, only 24 of the 106
salespeople having a good rating, while 52, or approx-
imately one-half, had a poor rating.
Why is it that salespeople who have a good appear-
ance, who know how to approach their customers, and
who have a good knowledge of their goods fall down
miserably in making their prospects want the goods?
The answer must be either that many of these people
know nothing about salesmanship and have no ability
to sell, or that they have become so accustomed to filling
orders that they have forgotten how to practice sales-
manship and have degenerated into "clerks." Desire can
be created by knowing the customer's needs, knowing
476 Retail Salesmanship
the goods and their uses, and picturing in an interested
and enthusiastic way the satisfaction which the goods
will give.
The close. — The retail customer often brings the sale
to a close by saying that she will take the article. If
she is undecided, the salesman can use the methods of
closing previously described, such, for example, as closing
on a minor point, answering additional objections, or
giving additional information to strengthen the desire.
When the customer is undecided, she often says that she
wants to look about a little more or that she wants to
think the matter over. This sometimes places the sales-
man in a difficult situation, as he and the goods will
probably still be available after she reaches a decision.
At times he points out that an immediate decision is
desirable as the article may be sold to someone else if
she delays, or that a price advance is to be expected.
At other times he may try to answer the buyer's un-
stated objections or he may go back and try to strengthen
her desire. He must, however, be careful not to attempt
to force the sale in such a way as to antagonize his pros-
pect.
Some salesmen try to close the sale by suggesting that
the customer take the article home and "if you don't
like it, you may return it." This is usually very poor
business as it increases the amount of returned goods
and increases the store's expense. It should be done
only when the salesman feels confident that the article
will be kept.
Suggestive selling. — Suggestive selling may greatly
increase the salesman's volume. When he sells one ar-
ticle, he may call his customer's attention to other ar-
ticles. These may be new goods just received, goods
that are on sale at reduced prices, articles that are es-
Retail Salesmanship 477
pecially suited to the customer, or any attractive goods
that the salesman feels are adapted to the needs of the
buyer. The salesman may say: "We have just received
a new lot of very nice dresses which I believe you would
like, the very latest styles" ; or, "We have a special bar-
gain today in towels"; or, "We have some beautiful blue
taffeta, just the shade you like." On making a sale of
shoes, the salesman may suggest, "Wouldn't you like
some hosiery to match the shoes?" Or, upon selling
shirts he may suggest the purchase of ties. Suggestive
selling of the latter kind is known as "ensemble selling"
or "selling companion goods."
The grocery salesman has an excellent opportunity for
suggestive selling. Most of us are interested in foods
and like a varied diet. Therefore we like the salesman
to call our attention to fresh goods, new products, or ar-
ticles of unusual quality. The salesman may say: "We
have some very fine freestone peaches today." "We have
some roasting ears fresh from the field, the best we've
had this year." "How about some nice fresh blueber-
ries? They make the most delicious pies." "We have
a mighty fine value in canned peaches."
Telephone selling. — Many salesmen use the telephone
to increase their sales. They may telephone on rainy
days when there are few customers in the store. They
may call their customers to tell them about new goods
that have just been received. They may tell about
goods that they feel are especially suited to the individ-
ual needs of their customers, or they may call the atten-
tion of their customers to goods on special sale.
Opportunity for real salesmanship. — By knowing his
goods and his customers, by knowing how to create de-
sire, by using suggestive selling, and by using the tele-
phone, the retail salesman can be a real salesman. He
478 Retail Salesmanship
can practice a high grade of salesmanship even though a
considerable portion of his time is occupied in the cleri-
cal work of filling orders. The personal traits necessary
for success in selling are discussed in the next chapter.
Chapter 29
Review Questions
1. How does retail selling differ from other types of
selling?
2. In what ways is retail selling easier than other types
of selling?
3. In what way is retail selling more difficult than other
types of selling?
4. Why are retail salespeople sometimes called "clerks"?
5. Does the retail salesman have to make preapproaches?
6. What should the retail salesman know about his regular
customers?
7. How should the salesman approach and greet the
customer?
8. What is meant by the size-up?
9. Is the size-up important? Why, or why not?
10. How can the salesman size up his customers?
11. What is the salesman's first problem after greeting the
customer?
12. What is meant by saying that the salesman "should not
narrow the choice too much."
13. What is the difference in the way shopping and con-
venience goods should be shown to the customers?
14. How should the salesman help the hesitating buyer to
reach a decision?
15. How should the salesman proceed when necessary to
sell two or more people?
Retail Salesmanship 479
16. What is meant by substitution? What rules should
the salesman follow in offering substitutes?
17. Why do retail salespeople have so much difficulty in
creating desire?
18. How may retail salespeople create desire?
19. What should the salesman do when the customer says
that she wants to think about the purchase a little more
before making her decision*?
20. Should the salesman suggest taking the article home
and returning it if the customer decides she doesn't like it?
21. What is meant by suggestive selling? How may it be
used?
22. When and how may the salesman use the telephone?
Thought Problems
1. Some stores teach their salespeople to substitute goods
under their own private brands or other goods carrying larger
margins on every possible occasion when goods carrying
smaller margins are requested. Other stores instruct their
salesmen never to substitute. What do you think of these
two policies? Which is the better? What policy should a
retailer follow in regard to substituting?
2. What do you think of reading peoples' characteristics
from the shape of their heads, features, and the color of
their eyes and skin?
3. Do you think that it is possible for the salesman to
size up his customers by observing their actions and words
closely? Give your reasons.
4. Visit retail stores and rate the salespeople who wait
on you on blanks like that on page 480 marked "Shopper's
Report on Retail Salespeople. " You do not have to make
purchases, but you should act naturally as a real prospective
buyer. (Prepare 'the necessary blanks for the number of re-
ports required by your instructor.)
SHOPPER'S REPORT ON RETAIL SALESPEOPLE
Store
Date and hour-
Name or number or description of salesperson-
Article-
-RATING-
_ . . _ Value Good Fair Poor Remarks
Points observed:
Appearance 15%
Approach 10%
Interest in customer,
merchandise, and store 15%
Knowledge of goods, uses,
colors, qualities, style, etc. 25%
Force or ability to create desire 35%
Total rating percentage 100%
(80-100%, Good; 60-79%, Fair; under 60%, Poor)
Comments:
Did salesperson offer to substitute?
Did salesperson use suggestive selling?
Promptness in wrapping, making change, or making out sales slip or
want slip?
Did salesperson call back amount of money in making change?
Would you want the salesperson to wait on you again?
Other comments:
480
CHAPTER 30
Success in Selling
Qualifications for success. — Success in selling depends
upon knowledge, hard work, and certain personal traits
or qualities. These qualifications may be summarized
as follows:
I. Knowledge of:
A. Goods
B. Principles of salesmanship
II. Personality:
A. Obvious or superficial aspects:
1. Appearance — neatness, clothes, bearing or
posture
2. Facial expression
3. Pleasing voice
4. Manners (courtesy)
5. Breath not offensive
6. Ability to talk intelligently on a variety
of subjects
B. Fundamental traits:
1. Good health
2. Honesty
3. Industry
4. Perseverance
5. Self-confidence
6. Enthusiasm
7. Sincerity
8. Initiative
9. Tact
Many of these qualities are necessary for success in
any kind of work; some of them are especially impor-
481
482 Success in Selling
tant for success in selling. Specialized knowledge is
necessary for success in almost any line of work. A
pleasing personality is helpful in any vocation but is
particularly important for the salesman. Of the funda-
mental, or character, traits, the first four are very im-
portant in any calling, while the last five are especially
important to the salesman, although they, too, are im-
portant in many other kinds of work.
Knowledge. — The salesman needs to have a thorough
knowledge of his goods and of their uses, and he should
be able to impart this knowledge to others. He should
know the principles of salesmanship as explained in the
preceding chapters. The salesman should know all about
his product — how it is made, the kind of raw materials
used, the reason for its design, and the advantages of all
attachments. He should understand all of its uses.
He should know the services his company renders and
its policies.
The salesman should also know all about competing
products, so that he can answer objections. He should
not "knock" his competitors or their goods (unless
they are fraudulent). He should not ordinarily mention
his competitors unless the prospect brings them into the
discussion.
The salesman should know his goods so thoroughly
that he can see talking points sticking out all over them.
Here is an aluminum teakettle. One man sees only a
teakettle. The salesman, who knows his product, how-
ever, sees much more than a teakettle. He sees that it
has a wooden handle that does not get hot easily. He
sees that this handle is hexagonal so that the hand can
grip it tightly. He sees that the handle ears are welded
on and not fastened on with rivets which will wear loose.
He sees that the spout is welded on. He sees that the
Success in Selling 483
ears which hold the handle are so made that the handle
cannot touch the hot sides of the kettle. He sees that
the lid of the kettle has a wooden knob which will not
burn the hand when one is lifting it. He sees that the
kettle has a very wide base which decreases the time
necessary for heating. He sees the very fine finish on
the metal. He sees the trademark, and he knows that
this stands for reputation and gives a guarantee of high
quality.
Securing information. — Many companies have train-
ing courses or sales manuals which give much informa-
tion on the company's products; the salesman should
study these sales manuals when they are available. He
should read trade papers covering his product, as they
contain much valuable information about the product
and how to sell it. Books treating the products may also
be available, and study and use of the product itself is
extremely helpful. The salesman should talk to users
of the product. The retail salespeople can give the
wholesale salesman much valuable information.
The retail salesman. — Retail merchants all too fre-
quently fail to give their salespeople the information
necessary for the intelligent sale of their goods. Re-
gardless of the training given by his employer, the sales-
man should study his goods and obtain information for
himself. He should listen to the sales talks given by the
wholesale salesman, when this is possible. He should
read the labels on the packages and find what claims
are made for the goods and what instructions are neces-
sary for their use. He should read one or more trade
papers in the field. He should read women's magazines.
These magazines will give much information about vari-
ous kinds of goods used in the homes, about the adver-
tising that is reaching the women, and about the woman's
484 Success in Selling
point of view. This is important, for women make up
the majority of purchasers in most retail stores.
Many manuals have been prepared covering various
lines of merchandise, such as suits, sweaters, hosiery,
men's furnishings, glassware, silks, house dresses, jewelry,
notions, household furnishings, and so forth. The sales-
man should visit the libraries and write to publishers1
and to trade papers to find out what manuals are avail-
able in his field, and obtain those suited to his needs.
The salesman should listen to his customers and to other
users of his products. He can learn much in this way.
Experience in the stockrooms and in the service depart-
ment will teach him much.
Time for study. — Any ambitious person is glad to use
a portion of his evenings for the study of his work.
Salesmen should also find plenty of time for study at
other times. The traveling salesman spends much time
waiting for interviews. If he travels by train, he has
much time on the train which can be used for study.
The retail salesman has much spare time while waiting
for customers. Although he must be ready at all times
to serve a customer on an instant's notice, he may be
able to find time to study the sales manuals, trade pa-
pers, and his goods when no customers are in his
department.
Can a salesman know too much about his product? —
It is sometimes argued that it is dangerous for a sales-
man to know a great deal about his product because of
the danger of boring his customers with details which
do not interest them. This is an argument against the
1The Research Bureau of Retail Training, University of Pittsburgh,
Pittsburgh, Pa., and The McGraw-Hill Book Co., Inc., and The Ronald
Press Co., both of New York City, publish series of sales manuals
covering various types of merchandise.
Success in Selling 485
abuse of knowledge and not against knowledge itself.
The salesman should have the knowledge to use when
necessary — he should use just what he needs in making
his sales talk and should keep the rest in reserve for
answering objections and for those customers who want
complete information.
Personality. — A good personality is always listed as
an essential qualification for success in selling. There
are many aspects of personality. Speaking narrowly,
personality is the appearance a person makes and the
impression which he creates on first acquaintance.
Speaking broadly, personality includes not only one's
appearance, voice, and manner, but all of his traits of
character and all of his habits.
Appearance. — One is often judged by his appearance.
It is therefore important that the salesman make a good
appearance. The salesman should be clean and neat. It
is not necessary to wear expensive clothes, but the
clothes should be clean, the suit pressed, the shoes shined,
and the tie straight. The salesman should carry himself
well: he should walk erect with a brisk step and shoul-
ders back. Clothes do not make the man, but knowing
that he makes a good appearance will help the salesman
to maintain his self-confidence. The salesman wants to
center attention on his goods and should therefore not
attract attention to himself by his attire. His clothing
and accessories should be conservative, and loud colors
and unusual adornments should be avoided.
Facial expression. — The facial expression should be
pleasant. A scowl, frown, or pessimistic expression hurts
one's appearance.
Voice. — The salesman should cultivate a pleasing voice.
A man who is very successful in his personal relations
with others says that he tries to pitch his voice slightly
486 Success in Selling
lower than the person to whom he is talking. A harsh,
shrill, or coarse voice is repulsive. One should pronounce
each word distinctly and should avoid talking too fast.
The salesman should cultivate his vocabulary so that
he can use words properly. Short, simple words are
preferred, but the vocabulary used should vary some-
what with the prospects. The salesman should not talk
"over the heads" of his prospects. He must be more
careful in his language when talking to educated and
cultivated people than when selling a rougher class of
buyers. Some slang is permissible, but the salesman
should use it with care. The salesman should avoid
profanity. Some buyers may not object to it, but a
great many do. The salesman who uses profanity is in
constant danger of offending some of his prospects. The
absence of profanity offends no one.
Manners. — The salesman should cultivate courtesy
and good manners. Rudeness should be avoided at all
times. A bad breath is very offensive to prospects, and
the salesman should not hesitate to ask his friends or
other salesmen whether his breath is offensive.
Conversation. — It is often desirable for a salesman to
be able to talk interestingly on a variety of topics. To be
able to do this, he must have some knowledge of many
things — baseball, golf, football, current news, and so
forth. He must, of course, be very discreet in discussing
religion and politics. Although it is desirable to be a
good conversationalist, this is not absolutely necessary
to be successful in selling.
Health. — It is very difficult for one to succeed without
good health and the energy, endurance, and vitality
which good health gives. The traveling salesman often
has irregular sleep and meals. The retail salesman is on
his feet many hours a day and spends practically all the
Success in Selling 487
daylight hours inside. For these reasons, the salesman
should devote time and attention to his health.
Honesty. — Honesty is a prerequisite for successful
work in any legitimate business. The salesman should
be honest with his customers, with his company, and
with himself.
Industry. — Hard work has helped many men to suc-
cess. Some men have succeeded without industry, but
these are the exceptions. Unless a man is outstanding
in some other way, he will lose out in the competitive
struggle if he does not work hard and consistently. Foot-
work and shoe leather are important to a salesman's
success. Industry is a trait that can be developed. A
lazy person can force himself to work, and by working
consistently he develops the habit of industry. Industry
alone, however, will not make a man successful, for
he must also work intelligently.
Perseverance. — One should not only be industrious,
but should be persistently industrious. The salesman
needs to keep constantly at work, even when business
is bad and when he is discouraged. Salesmen often
become disceuraged. Disagreeable prospects must be
seen. It is very easy for the salesman to make excuses
and to persuade himself to take a rest. "It's too hot
to sell anything." "I can't get any business this week —
everyone is away on his vacation." "Everybody is too
busy on Saturday to talk to a salesman." "It's too
late to make any more calls today." These are typical
excuses. The salesman needs perseverance so that he
will not allow such excuses to cause him to stop work.
Perseverance keeps a salesman calling on prospects
even when the outlook for business is poor.
Confidence. — A salesman needs confidence in his prod-
uct, in his employer, and in himself. If he does not
488 Success in Selling
sincerely feel that he has a good product, he should not
sell it. If his employer does not deserve his respect
and confidence, he should get another job. If a salesman
loses his self-confidence, it is very hard for him to con-
vince others, and this means that it is very hard for
him to make sales.
Self-confidence is a belief in one's self and in one's
ability. It grows out of accomplishment, out of success-
ful work, and out of a knowledge that one can do things.
It develops from a knowledge that buyers have been
met and sales have been made. When just beginning
work, or when sales are few, the salesman often needs
courage and "nerve" to keep up his confidence. He
must think in terms of success. He should remember
that the other fellow is just a human being like himself.
Some people have too much confidence — are over-
confident. It is better for a salesman to have too much
than too little confidence. Yet over-confidence is dan-
gerous, for it leads the salesman to depend too much on
his own ability and not enough on knowledge of his
goods, on the preapproach, and on planned sales talks.
Enthusiasm. — Enthusiasm is described las "exalted or
ecstatic feeling/' and as confidence energized and put
to work. A salesman may be said to be enthusiastic
when he is sincerely excited about his product. Enthu-
siasm is a great help in selling because it is contagious
and helps to arouse the prospect's desire. It has been
said that most of the worthwhile things in the world
are done by enthusiastic people.
Some people are naturally enthusiastic, while others
must develop their enthusiasm. Enthusiasm may be
developed by a thorough knowledge of the goods. If
one knows his goods thoroughly and the satisfaction
which they give, enthusiasm is easy to develop. It is
Success in Selling 489
said that there is a romance behind every product; it
may be in the way the product was discovered or the
method of producing it, in a description of the countries
from which the raw materials come, in the methods
of manufacture, or in the work which the product does.
Sincerity. — A person is sincere when he is in reality
what he appears to be — when he means exactly what
he says. The salesman is sincere when he has an honest
and genuine belief in what he says. Sincerity carries
conviction. The buyer is inclined to be suspicious of
the salesman's enthusiasm, and if he feels that the
salesman is insincere, he discounts all of his statements.
But if he believes that the salesman is sincere, what
the salesman says carries weight.
Initiative. — The dictionary defines initiative as "abil-
ity for original conception and independent action."
Initiative is to a person what the self-starter is to an
automobile. Many people do not have self-starters and
must be "cranked up" to get action. The man with
initiative can meet new circumstances. He is able to
think of plans in emergencies, and he continually does
more than is expected. The exercise of initiative de-
velops judgment, and, when coupled with industry and
good health, it gives vitality and aggressiveness. Ag-
gressiveness is very important in a salesman, particularly
in the specialty salesman. The salesman is always meet-
ing new situations. No two customers are exactly alike.
Initiative helps the salesman to meet new situations
and to work out answers to new objections. The retail
salesman with initiative does not wait for his employer
to give him information about his goods to begin study-
ing them.
Initiative keeps a person out of a rut. People are
prone to get in the habit of doing the same old things
490 Success in Selling
in the same old ways. The salesman too often gets in
the habit of calling on the same customers and of saying
the same things. Initiative will help him secure new
prospects, new facts, and new sales points.
Tact. — Tact has been defined as a mental alertness
which enables us to say and do what is right under
the circumstances. It is a quick appreciation of what
is fit or proper. To the salesman it means that he varies
his manner and his method to fit his prospects. It
involves the use of patience, cheerfulness, courtesy, and
graciousness. Some people think that tact depends upon
intuition and cannot be developed — that one either has
or does not have it. Some people are naturally more
tactful than others. Nevertheless tact can be developed
to a certain extent. It is based on the "you" attitude,
of considering what is going on in the other fellow's
mind, and of thinking of how he will react to certain
statements and actions. Thus if one will develop the
habit of observation and of thinking from the other
fellow's viewpoint, he can develop tact.
As the salesman's job is to influence others, he should
be very tactful. The salesman who is tactful varies his
manner and his method to fit his various customers.
He refrains from doing or saying things to hurt their
feelings and avoids arguments.
Tact is often in conflict with some of the other traits
that are needed by the salesman. The person who is
aggressive, who has initiative, who is enthusiastic, and
who possesses a great deal of self-confidence is likely
to be untactful, for it is very hard for a person to develop
his self-confidence to a high degree without becoming
egotistic. The egotist usually lacks tact. It is possible,
but difficult, to possess to high degrees both self-
confidence and tact.
Success in Selling 491
Other traits. — Many other qualities that are desirable
for the salesman might be listed. Among these are
imagination, courage, optimism, and the ability to benefit
by criticism. The salesman needs imagination in order
to visualise the customer's use of the product. The
salesman needs courage to enable him to call upon
difficult and disagreeable prospects and to meet stiff
competition. The salesman needs optimism, for without
optimism it is very difficult to become enthusiastic.
People dislike pessimists and it is very difficult for a
pessimist to make a good salesman.
All traits not necessary. — It would perhaps be impos-
sible to find one person who had all of the traits and
qualities discussed in this chapter developed to a high
degree. One may succeed because he has a few of these
qualities developed to a high degree, or because he has
several of them developed to a fair degree.
Chapter 30
Review Questions
L What are the qualifications necessary for success in
selling?
2. Are all of the qualifications listed necessary for success
in selling?
3. Which of these qualifications do you feel are most
important for a salesman?
4. What should a salesman know about his product?
5. How may a salesman secure the needed information
about his goods?
6. Should the retail salesman read women's magazines?
Why, or why not?
7. How can the retail salesman find out whether sales
manuals describing the goods which he sells are available?
8. Can a salesman know too much about his product?
Why?
9. What is personality?
10. Can one's appearance be changed? What kind of
appearance should the salesman make?
11. Can one develop a pleasant facial expression?
12. Can one develop a pleasing voice?
13. How may good manners be obtained?
14. Why should a salesman have a knowledge of a variety
of subjects.?
15. Is good health necessary to success?
16. Can one develop good health?
17. Is industry necessary to success?
18. Can industry be developed? Are some people born
lazy?
19. What is meant by perseverance?
20. What is meant by self-confidence?
21. Can one develop his self-confidence? If so, how? If
not, why?
22. What is meant by enthusiasm?
23. Must one be enthusiastic to succeed in selling? In
other work?
24. Can one lacking enthusiasm develop this trait?
25. What is meant by sincerity?
26. Must a salesman be sincere to succeed?
27. Can sincerity be developed?
28. What is meant by initiative?
29. Can initiative be developed?
30. What is meant by tact?
31. Does a salesman have to be tactful to be successful?
32. Is it possible to be tactful and at the same time to be
self-confident and aggressive?
Success in Selling 493
33. It has been said that some people are born tactful and
others are born tactless. How about it?
34. What traits besides those included in the outline are
desirable?
35. Does the salesman have to have all of the traits in-
cluded in the outline developed to a high degree to be suc-
cessful? If not, which traits do you consider the most
important?
Thought Problems
1. To what extent is the employer responsible for teach-
ing the salesman what he needs to know about the goods,
and to what extent is the salesman responsible for securing
this information for himself?
2. Is it better for a salesman to try to develop all of the
traits listed, or to try to develop some of them to a very
high degree and to depend upon his strength in these to
offset his weakness in other traits?
3. How many important character traits, or aspects of
personality, can you name that were not listed in this chapter?
Do not include in the list terms that are only synonyms of
the terms listed.
4. Rate yourself on the rating blank on page 494 or
one similar to it. This is to be done in confidence and you
are to state your frank opinion of yourself after thinking
the matter over carefully. Rate yourself without consulting
others. It is not necessary for you to show your ratings
to other students nor for you to see the ratings of other
students.
Before rating yourself on any trait, select the person who
has the trait in question most highly developed among all
the people you know or have read about. Take this person
as 100 per cent and rate yourself by comparison. For ex-
ample, take the most industrious person you have known
or have read about and consider his industry as 100 per
cent; then rate yourself accordingly. Select the most sincere
person you know (probably a different person) and take
SELF-ANALYSIS CHART
Rate yourself on the following personal qualities or traits as excellent
(90-100 per cent), good (75-89 per cent), fair (60-74 per cent), moderate
(45-59 per cent), and poor (under 45 per cent).
1. Appearance:
Neatness —
Percentage:
Facial expression-
Bearing
Appearance average
2. Speech:
Voice-
Vocabulary
Ability to converse interestingly on a variety
of subjects
3. Courtesy-
4. Sincerity -
5. Enthusiasm.
6. Self -confidence _
7. Honesty
8. Courage
9. Initiative-
10. Aggressiveness-
11. Tact-
12. Industry -
13. Perseverance -
14. Health
Speech average
Average rating-
494
Success in Selling 495
his sincerity as 100 per cent; then rate yourself by comparison
to him.
When you have finished the ratings, study them carefully
and see where you are low. Work out methods by which
you will try to improve your poorest traits.
The rating blanks may be handed in to the instructor for
comparison to determine the average rating of the class on
each trait.
5. Using the method explained in Problem 4, rate other
members of your class.
CHAPTER 31
Sales Management
The sales department. — A company's sales policies are
formulated by the chief sales executive or by the officials
or board of directors. The sales policies of a company
include the method of distributing its products, its
prices, its service policies, the methods used in adver-
tising and the amount done, and the organization of its
sales department. The sales department is usually in
the charge of a sales manager, who carries out the
company's selling policies. The sales manager's job is
to hire, train, supervise, and reward the salesmen. He
may also formulate or help to formulate the sales poli-
cies.
Hiring salesmen: Type of men needed. — Different
companies need different types of salesmen. If a com-
pany sells its products to business executives, it needs
well-educated and intelligent salesmen who have good
manners, and who make good appearances. On the
other hand, if it sells to the small retailers, it may use
less polished men.
If a company has a technical or highly complicated
mechanical product, it may need technically trained men.
It may employ graduate engineers, trained chemists,
or skilled mechanics. On the other hand, if the product
is a simple one (such, for example, as breakfast cereals
or toothpaste) technically trained men are unnecessary.
A new product needs a higher type of salesman than
496
Sales Management 497
a product which has an established reputation and mar-
ket. For the latter, order-takers may be able to do the
work.
Sources of men. — The following are some of the more
common sources of salesmen: high schools; colleges;
employees in the office, stockroom, or factory; expe-
rienced salesmen with other companies; retail sales-
people; and men in other kinds of work who feel that
they have sales ability.
The company with a technical product may want
university graduates. The machine company may select
mechanics from its own or other factories. A whole-
saler may select his salesmen from promising retail
salespeople. The retail store may select its salespeople
from high school graduates and friends of present em-
ployees. Some companies prefer to hire experienced
salesmen and may take men from competing concerns
or from salesmen who have sold other types of products.
Other companies prefer to hire men without sales expe-
rience and train them to suit their needs. Some com-
panies hire office boys and clerks whom they feel have
the ability to develop into salesmen.
Securing applications. — The sales manager may have
his salesmen keep their eyes open for promising pros-
pects among their customers and acquaintances. The
sales manager may visit high schools and colleges and
interview seniors who are recommended by the faculties.
He may advertise for salesmen in trade and business
papers. For retail salesmen and many types of specialty
salesmen, he may advertise in the newspapers. Many
applicants apply for positions voluntarily; this is espe-
cially true with large or well-known companies.
Selecting men. — Success in selling depends largely
upon such traits as industry, enthusiasm, self-confidence,
498 Sales Management
tact, sincerity, and perseverance, which are hard to
measure. We cannot merely look at a man and tell how
highly he has developed these traits. The principal
methods of selecting salesmen are by interviews with
them; by examining their past records as obtained from
application blanks, former employers, and references;
and by giving trade and psychological tests.
Interviews. — The interview may be of great help
in determining a man's appearance, neatness, manners,
voice, bearing, and ability to meet people and carry on
intelligent and interesting conversations. The employer
may invite the applicant to a meal or spend some time
with him socially. It is desirable to have an applicant
interviewed two or three times, as he may be nervous
on his first appearance; and it is also well to have him
interviewed by more than one person.
In order to find out something about the applicant's
self-confidence and ambition, he may be asked why he
wants to sell this product; why he wants to work for
this company; and how much he thinks he can earn.
He may also be asked to fill out a self-rating blank
similar to the one at the end of the last chapter.
Application blanks. — Application blanks usually
ask for information about the applicant's education,
business experience, family responsibilities, former em-
ployers, salaries received, and reasons for leaving former
positions. Some employers prefer men with sales expe-
rience in the same line and some desire those with
experience selling other lines, while others prefer men
without any sales experience.
Married men may be preferred for local territories,
as they are more steady and reliable. For large terri-
tories where the men are traveling most of the time,
younger, unmarried men are likely to be preferred, since
Sales Management 499
such territories keep them away from home most of the
time. For positions with small pay, the employer should
know the applicant's family responsibilities. If the ap-
plicant has to support a family, he may be greatly
dissatisfied or worried about financial matters and may
be tempted to be dishonest.
Former employers and references. — Information
is often obtained from the people given as references by
the applicant. Care must be used in interpreting the
information given by references, especially those un-
known to the employer. The sales manager may re-
ceive more accurate information from former employers
and others who know the applicant but who were not
given as references. Some sales managers secure infor-
mation about the applicant's character and experience
from local credit bureaus. A person who has changed
jobs frequently without bettering himself is likely to
be a floater who will soon become dissatisfied. However,
if he has bettered himself by each change, he* probably
possesses ambition, initiative, and self-confidence.
Tests. — Salesmen with high intelligence are
needed for selling complicated products and for calling
upon skilled buyers; but, on the whole, success in selling
does not depend primarily upon intelligence. For this
reason relatively little use is made of intelligence tests
in selecting salesmen. Trade tests, however, may be
used to advantage in determining how much the appli-
cant knows about the goods and about the principles
of salesmanship.
Training salesmen. — Some of the more widely used
methods of training salesmen involve: sales manuals;
standardized sales talks; coaching by older salesmen;
sales meetings; sales conventions; work in the company's
factory; and sales schools.
500 Sales Management
Many high schools, universities, and evening schools
of business administration offer courses in salesmanship.
These courses are usually very good, but usually are
limited in that they teach only the general principles
and cannot ordinarily give detailed instruction on spe-
cific products. Employers usually must give this in-
struction.
Many companies have sales manuals which the new
men are required to study. Companies using standard-
ized sales talks require the new men to learn these
talks. New salesmen usually have their work explained
to them by the sales manager or person in charge of
sales training; this may be done in a few talks or in a
series of lectures.
New salesmen may be turned over to older salesmen
who explain the goods to them and who show them how
to make sales. In a retail store the new salesgirl is
often turned over to an experienced salesgirl who acts
as her sponsor until she learns her duties. New field men
may be assigned as junior salesmen to work under senior
salesmen. Training may also be given by special coaches,
by supervisors, or by the sales manager.
Many companies have regular sales meetings at which
the merchandise, sales methods, and company policies
are discussed. Such meetings may be held weekly or
less frequently. Sales conventions are usually held once
or twice a year and are designed to stimulate and instruct
the salesmen. Both sales meetings and conventions are
primarily for the older salesmen, or the company's
dealers, but they may also be used in training new men.
Many companies have regular sales training courses.
These are often a combination of work in the classroom
with work in the plant, stockroom, warehouse, and office.
The courses vary from a few weeks to several months
Sales Management 501
in length. They give the new salesmen a knowledge of
the company's products, organization, sales methods,
and the principles and practice of salesmanship. Train-
ing courses are more often conducted by large companies,
which need many salesmen and hence can afford the
expense of conducting the courses, than by smaller
companies. Smaller companies often secure trained men
after they have had experience in selling with others.
Sales training courses may be given to new men or may
be given only to men who have demonstrated by actual
work that they have sales ability.
A small, well-trained sales force is often better than
a large and untrained force. Some companies have in-
creased their sales from 25 to 200 per cent by a complete
and thorough training of their salesmen. Often the
increased volume has been secured with a reduced
number of men.
Supervising salesmen. — The sales manager should
watch his men and check their work closely. He wants
them to cover all of their territories, call upon all of
their prospects, push all products, send in the required
reports, treat their customers properly, and carry out
the company's policies. Salesmen are likely to skip
territories which are hard to reach and prospects who
are not promising. They often fail to use the sales talks
and methods of approach recommended by the sales
manager. They may fail to give demonstrations, to
put out advertising matter, or to properly service the
company's products. Salesmen may fail to serve the
customers promptly, may fail to give full information
about the goods, may be rude, may fail to make out
want slips, may fill out sales slips incorrectly, or may
be slovenly in appearance.
It is evident that the proper supervision of salesmen
502 Sales Management
is a difficult task. This is particularly true of traveling
men. Some companies provide supervisors who spend
their time in the field visiting the salesmen and accom-
panying them on calls upon their prospects. Retail
stores often employ, in addition to department managers
and floor supervisors, professional shoppers who visit
the stores and report on the treatment received from the
salespeople.
Research, or analysis, is often helpful in sales super-
vision. In addition to showing the total sales volume
of each man by products, it may show the number of
customers visited, the sales to each customer, the number
of new customers secured, the number of old customers
lost, and the profit realized by each salesman. Such
analysis often shows that some salesmen do not push
the full line and that others do not call upon all of their
customers regularly. Analysis may show, for example,
that salesman Jones is not selling a part of his line
to customer Smith. The matter is called to Jones' at-
tention, and if there is no good reason, he is told to
make a special effort to sell the entire line to this dealer
on his next call. When such information is called to
the salesman's attention, he knows that his operations
are being checked, and he is not so likely to be careless.
Stimulating salesmen. — Traveling salesmen work by
themselves. They are calling upon buyers who are often
uninterested or hostile. It is very easy for them to
become discouraged, and it is hard for discouraged men
to get good results, for success depends to a considerable
extent upon enthusiasm, confidence, and energy. The
sales manager's task is to keep his men enthusiastic and
energetic. To do this he writes them letters, visits them
in the field, calls them together for sales meetings and
conventions, or issues a house paper (organ). No two
Sales Management 503
salesmen are exactly alike, for which reason they need
the personal attention of the sales manager. The man-
ager may have to encourage one man with praise and
scold another man for his laziness. He should maintain
strict discipline and at the same time secure the respect,
friendship, and confidence of his men.
Sales contests are often used to stimulate men. Prizes
may be given to the men who sell the most goods, who
secure the largest increase in sales, who make the most
calls, or who secure the largest number of new customers.
The salesmen may be divided into teams and contests
may be staged between the different teams. The suc-
cessful salesmen have their names in the house organ
and, if they become more successful, have their pictures
printed with accounts of their methods. The house
organ thus helps to stimulate the men and to build
morale.
The most important method of stimulating the men,
however, is through their pay checks.
Paying salesmen. — The most widely used methods of
paying salesmen are the straight salary, the straight
commission, the salary and commission, and various
forms of bonuses.
Straight salary. — The straight salary is a very widely
used method. It is used by many retail stores, by many
manufacturers and wholesalers whose men cover regular
territories, and by manufacturers of industrial equipment
whose sales are irregular. The straight salary method
gives the employer control over his men. As they are
paid for their time, he can require them to do other
work than selling — such as cleaning up stores, arranging
stock, putting up displays, arranging displays in cus-
tomers' stores, repairing goods, making out reports, or
hunting for new prospects. The assured salary takes
504 Sales Management
away a part of the incentive for "high pressure" tactics
which are so common when the men are paid by com-
missions. The assured salary relieves the men from
worry, which is so common with men on straight com-
missions, and leaves their minds more free for selling.
It gives a more permanent force of men. Men paid on
a commission basis are hard to control, have little loyalty
to the house, and are likely to quit at any time.
In the sale of industrial equipment, orders may be
very irregular, depending upon business prosperity.
Several salesmen may be involved in securing an order.
Negotiations may extend over many months. In such
cases, salaries seem to be the only method of paying
the salesmen, although some form of bonus or profit
sharing may be added.
The principal disadvantage of the straight salary
method is that it does not offer a strong incentive for
the men to increase their sales. Increased sales do not
lead to immediate increases in pay. Therefore the sales-
man may not put forth the effort required to increase
his sales volume. This disadvantage can be partially
overcome by increasing the salesman's salary when he
increases his sales. The practice of raising salaries as
soon as sales are increased, however, is dangerous. To
illustrate, suppose that a salesman works for a jobber
whose margin will allow 2 per cent for salesmen's
salaries. The salesman has been selling $100,000 a year
and receiving a salary of $2000. In a given year, he
sells $150,000 worth of goods and asks for a salary
increase to $3000. The increase in sales may have been
caused by business prosperity or some other reason aside
from the salesman's efforts. If the jobber gives the
increased salary and the man's sales drop back to
$100,000, his salary cost rises to 3 per cent. Since the
Sales Management 505
salesman objects to a cut in salary, the jobber must
either stand the increased selling cost or let the salesman
go. This illustrates why employers are often slow in
raising salaries. It also shows how the selling costs
increase under the salary method of paying salesmen.
However, if the employer does not increase the salaries
as the salesman increases his sales, then the vSalary
method does not offer the salesman an incentive to
do better work.
The traveling salesman working on a salary usually
has his expenses paid. The employer may pay all travel-
ing expenses as reported by the salesman, may make
a flat monthly allowance for expense, may pay expenses
of a certain fixed amount per day or per mile for distance
traveled, or may pay all expenses as long as they are
within a given percentage of sales.
Straight commission. — Under the straight commission
method, the salesmen are paid a definite percentage of
sales and they pay their own expenses. The principal
advantage of the straight commission method is that it
gives the men a very definite incentive to increase their
sales: increased sales mean increased pay. The employer
has a definite selling cost. He does not have to over-pay
salesmen who get little business, for they are paid for
all sales they make ; if their sales • decline, their pay
declines. The straight commission method is often used
for new products, for products that are hard to sell and
require real sales ability, and in sales organizations where
the salesmen must find their own prospects.
The straight commission method has several disad-
vantages. The salesmen often use "high pressure"
methods and antagonize the buyers; they are hard to
control; they object to doing any work except selling;
they change positions frequently; and they are often
506 Sales Management
poorly trained. Salesmen working on a commission
basis are inclined to cut prices and to push the goods
that are easiest to sell. A salesman might actually sell
a large volume of goods and yet lose money for his
employer. To avoid this situation, he may be paid
different percentages on different products, or a certain
percentage of the margin, or a certain percentage of the
profit on the goods. This method forces him to con-
centrate on the high-profit goods.
To secure the incentive of the straight commission
method and at the same time avoid its worst disad-
vantages, a combination of salary and commission is
often used.
Salary and commission. — Under this method the sales-
man is guaranteed a certain salary and is paid a com-
mission on all sales over a stated amount, called a
quota. The jobber in the illustration above might have
paid the salesman $2,000, plus a commission on all sales
over $100,000. If the salesman sold $150,000, he would
receive his regular $2,000 salary and a commission on
the $50,000 in excess of his quota. If the rate of com-
mission was 2 per cent, his commission would have been
$1,000 and his total earnings $3,000. The next year,
if his sales dropped to $100,000, he would receive his
regular salary of $2,000.
The salesman is thus guaranteed his regular salary
and so does not have to worry about supporting himself
and family. At the same time he is offered an incentive
to increase his sales. If properly adjusted, the salary
and commission method may have most of the advan-
tages of both the salary and the commission methods.
If improperly adjusted, it may have the disadvantages
of either method. If the quota is set so high that the
Sales Management 507
salesman has little hope of reaching it, the commission
is no incentive to him; the plan is in effect a straight
salary method. If, on the other hand, the quota is set
too low, the salesman receives most of his compensation
from his commissions and so becomes in fact a com-
mission salesman. Hence the quota of each salesman
should be set with care.
The rate of commission paid varies. It may be the
same rate used by the employer in determining basic
salaries, or it may be higher or lower.1
Bonuses. — The salesmen may receive bonuses for sell-
ing high-profit lines, for selling slow-moving goods, for
securing new customers, for giving service to the cus-
tomers, for work in putting out advertising matter, for
arranging dealer displays, for increasing sales, or for
their general value to the house as judged by the com-
pany's executives. Bonuses for selling slow-moving
goods in retail stores are called "PM's" and "spiffs/7
A certain portion of the company's profits may be set
aside at the end of the year for division among the
salesmen. This is called "profit sharing."
Organization. — A small company may use a home of-
fice organization and direct all of its salesmen from the
home office. A large company covering a large territory
will be likely to have branch sales offices located in
1 Many employers use a lower rate. Thus, if the jobber used a rate
of 2 per cent in determining basic salaries, he might offer iMs per cent
commission on all sales over the quota; in the above example, then, the
salesman would receive $750 commission in the year that he sold
$150,000. The employer feels that this is enough to stimulate the
men. On the other hand, some employers may want to give their
men a stronger incentive to increase sales, and so pay a higher rate of
commission. Thus, the above jobber might pay 2% per cent com-
mission on sales from $100,000 to $150,000, 3 per cent on sales from
$150,000 to $200,000, and 3% per cent on all sales over $200,000.
508 Sales Management
various cities. These offices are in the charge of branch
sales managers, who supervise the salesmen in their
territories.
A company with one product or a line of similar
products will probably have only one sales organization
if it sells to only one type of buyers. If, on the other
hand, its customers include different types of buyers,
it may have a separate sales force for each type.
Thus a manufacturing company may have one sales
force to sell the retail dealers, another to sell to whole-
salers, another to sell to industrial buyers, and a fourth
to sell institutions. If the company makes a variety of
dissimilar products, several sales organizations may be
needed.
Territories. — The sales manager should assign his men
to territories to which they are suited. Thus a New
Yorker is said to be poorly adapted to any territory
distant from New York. Western men are said to be
needed for far western territories, while southerners
are best adapted to southern territories. If a territory
includes a great many foreign-speaking buyers, a sales-
man familiar with the language is highly desirable.
The territories should not contain more prospects than
the salesman is able to handle and yet should be large
enough to keep him fully employed. Some territories
have been divided along geographical lines, with the
result that some salesmen have more prospects than they
can handle, while others do not have enough prospects
to keep them busy. The size of a territory should
depend upon the number of potential customers and
the transportation facilities, rather than upon the num-
ber of square miles of area or its population. Some
companies assign certain lists of prospects to their sales-
men, rather than give them territories with definite
Sales Management 509
geographical boundaries. Under this method the buyers
are assigned to salesmen who are qualified to serve them
and a salesman is not expected to call on many different
types of buyers.
Chapter 31
Review Questions
1. What does the sales policy of a company include?
2. What is the work of the sales manager?
3. Why does the type of salesmen needed vary in different
companies?
4. From what sources may a sales manager recruit his
men?
5. How may the sales manager get in touch with men
who want positions?
6. How do sales managers select men?
7. What can you say of the usefulness of the following
methods used in selecting salesmen: interviews? application
blanks? intelligence tests? trade tests? information furnished
by references?
8. Name the different methods used in training salesmen.
9. Why do salesmen have to be supervised?
10. What methods may the sales manager use in super-
vising men?
11. How may sales research or analysis be used in super-
vising men?
12. How may salesmen be stimulated? Do salesmen need
stimulating more than men in other positions?
13. What can you say of sales contests?
14. What are the advantages and disadvantages of paying
salesmen straight salaries?
15. What is the principal advantage and the principal
disadvantage of the straight commission method?
510 Sales Management
16. What do you think of the salary and commission
method of paying salesmen?
17. Is it possible to use a salary-commission method of
paying salesmen so as to avoid the disadvantages and secure
the advantages of both the salary and commission methods?
18. What are bonuses? For what are they paid?
19. What is the difference between a home office and a
branch office sales organization?
20. When does a company need two or more forces of
salesmen?
21. How should the sales manager assign territories to his
men?
22. What can you say of the policy of assigning each
salesman a list of customers and prospects, rather than as-
signing him a definite geographical territory?
Thought Problems
1. The sales manager is often a very highly paid man.
Why?
2. What qualifications does a man need to become a
successful sales manager?
3. Would you say that the sales department was more
or less important than the following: the production de-
partment? the advertising department? the finance depart-
ment? the legal department?
4. What types of salesmen are needed to sell to the
following: wholesale grocers? retail grocers? purchasing agents
for large corporations? housewives on a house-to-house basis?
5. Do you believe that bonuses are really effective stimu-
lants to salesmen?
6. Do men or women make the best salespeople in selling
the following types of goods in retail stores: furniture? men's
clothing? kitchen supplies? groceries? cheap jewelry? high-
priced jewelry? women's coats? electrical merchandise?
radios? musical instruments?
Sales Management 511
7. When a salary and commission method is used, should
the rate of commission paid be the same as, or lower or higher
than, the rate used in determining the basic salaries?
8. What kind of a sales organization does a company
need that sells lubricating oils and greases to retail filling
stations, to wholesalers, to factories for the lubrication of
their machinery, to railroads and public utilities, and to the
operators of large fleets of motor trucks?
What types of salesmen are needed? What training or
education do they need?
9. Salesman Smith receives a salary of $4,800 a year,
plus a bonus of 2 per cent on all sales over his quota of
$200,000 a year. What does he earn if he sells $150,000?
$250,000? $400,000?
The next year his quota is set at $260,000, but his salary
is unchanged. What does he earn if he sells $230,000? $275,-
000? $350,000?
CHAPTER 32
Advertising Principles and Policies
Three methods of stimulating sales. — The three prin-
cipal methods of stimulating sales are personal salesman-
ship, the display of the goods, and advertising. All three
methods are frequently used by the same seller. The
retail store, for example, sells through salespeople, dis-
plays its goods on its counters and in its windows, and
advertises in the newspapers and in various other
ways.
Why advertise? — The seller may advertise because he
can get his message to the buyers more cheaply and
more quickly by advertising than by salesmen. It takes
time to build a sales organization: salesmen must be
hired and trained. A salesman can talk to only a lim-
ited number of buyers each day. An advertising cam-
paign, on the other hand, may cover a city, a state, or
even the nation within a few days. Advertisements in
newspapers and magazines are before the buyers as soon
as the periodicals are distributed. It is doubtful if a
new product could be distributed quickly over a large
territory without advertising.
Advertising goes where salesmen cannot go. Adver-
tisements enter our homes in the newspapers and maga-
zines and are with us at all hours. Billboards and electric
signs confront us at every turn. Radio advertising is
with us in much of our entertainment. Advertising can
make more frequent calls than the salesmen. For ex-
ample, when a salesman makes a call, if he does not se-
512
Advertising Principles and Policies 513
cure an order within a reasonable time, he must go on to
another prospect. But the advertisements are repeated
over and over again and are with us at all times. They
may attract our attention and secure our interest and
perhaps our desire "when we are off our guard/' so to
speak.
Limitations. — Advertising has many limitations. It
lacks personal appeal. It is easily ignored. The adver-
tisement cannot answer questions or objections. Perhaps
the reader is not fully convinced by the advertisement —
he may be skeptical about some of the statements or
may not fully understand the product. The adver-
tisement gives its message and quits. A salesman, on the
other hand, can give additional information, can an-
swer questions, can offer proof of his statements, can
demonstrate the product, and can answer the prospect's
objections. The advertisement is weak on closing the
sale. For this reason, advertising is often used to do the
preliminary work in selling — in attracting attention and
arousing interest — while salesmen are used in closing the
sales or in actually getting the orders.
What advertising does. — Advertising may win accept-
ance for a product. When the buyer is offered an adver-
tised product, the name is familiar to him. He often
renjembers seeing it advertised, and, other things being
equal, he will usually choose it rather than a non-adver-
tised product.
Advertising may induce the buyer to ask for the prod-
uct by name. The salesman, however, may not have
the advertised product or may feel that some other prod-
uct is better. He therefore recommends a substitute.
If the buyer has more confidence in the salesman than in
the advertising, he usually buys the substitute.
Advertising may be so convincing that the buyer not
514 Advertising Principles and Policies
only asks for the product by name but insists on having
it and refuses to buy a substitute. If one seller does not
have it, he goes to another store or waits for another
salesman to call. Advertisers would like to win the in-
sistence of the buyers for their products. As a matter of
fact, however, all that successful advertising usually
does is to secure acceptance for the products.
In selling by mail, advertising replaces the salesmen
and induces people to buy ; it completes the sale. How-
ever, advertising usually supplements the work of sales-
men; it precedes them and builds interest before they
meet the buyers.
Cost of advertising. — Advertising is estimated to cost
a little less than two billions of dollars annually. This
includes the various kinds of advertising, such as that
done in newspapers, in magazines, on billboards and
other outdoor signs, by direct-mail matter, by radio, by
dealer helps, by want ads, by catalogs, and by novelties.
The total volume of goods sold annually at retail was
over 50 billion dollars in 1929, was approximately 30
billion dollars in 1933, and is perhaps 40 billion dollars
at this writing. Advertising is done to sell both goods
and services. A considerable sum is spent to promote
the sale of insurance, investments, amusements, travel,
hotel rooms, and many different forms of personal serv-
ices not included in the figure for retail sales. We may
therefore estimate, in a general way, that advertising
takes approximately three cents out of each dollar the
consumer spends for goods and services.
Is advertising worth its cost? — Is advertising worth its
cost to the consumers? It is argued by some that the
money spent for advertising is largely wasted in so far
as the consumers are concerned; that it is spent in the
competition of rival sellers for business; and that each
Advertising Principles and Policies 515
seller advertises in an attempt to increase his sales at
the expense of other sellers. We may admit at once that
there is much waste in advertising, but so is there in all
forms of human activity.
It is also argued that much advertising is exaggerated
or dishonest and makes sales by deceiving the public.
We must admit that there is such advertising. On the
other hand, advertising men have taken the lead in pro-
moting "truth in advertising" and improving business
ethics. After making allowances for boasting or "puff-
ing," the great part of advertising today is reasonably
honest. Advertising is more truthful than personal sales-
manship.
Advertising has many advantages. It has an edu-
cational value: it teaches us much about new prod-
ucts, sanitation, health, - and foods, and it introduces
luxuries. It makes us want things, and we work harder
to get them. By such work the human race has won
much of its increased standard of living during the past
century. Advertising also makes possible many of our
newspapers and magazines which would not be published
except for the revenue from advertising.
Advertising is said to be cheaper than personal sales-
manship. The results obtained by the 3 per cent spent
for advertising might cost more if secured by personal
salesmen. Many advertisements can be distributed for
the cost of having a salesman make one call. Adver-
tising saves the time of the salesmen, as they can usu-
ally sell an advertised product in much less time than
a non-advertised product. The buyers have more confi-
dence in the advertised product, and the salesman spends
less time in explaining its merits and giving assurances
of its quality.
Many advertising men argue that advertising increases
516 Advertising Principles and Policies
sales and so allows the manufacturer to produce in larger
quantities and hence at a lower cost per unit. They
argue that a part of this saving is passed on to the con-
sumer who can get the goods more cheaply than he could
if they were not advertised. The theory back of this
argument is known as the law of decreasing costs. This
is an important economic law, but its importance is
greatly exaggerated. Nevertheless, there are some in-
stances in which advertising has helped to reduce the
prices to the consumers.
The advertising policy. — Advertising is a part of the
general plan of distribution. It is not a thing apart, but
an integral part of the concern's business policies. The
correct advertising policy depends largely upon the
method of distribution, the product, the territory cov-
ered, and the size and financial strength of the seller.
The seller must first determine whether or not he will
advertise. If he determines to advertise, he must de-
termine what he will advertise, how much he will spend
for advertising, when and where he will advertise, the
kind of advertising to be used, and whether or not he
will use an advertising agency. He must also decide
what use he will make of publicity.
Deciding whether or not to advertise. — Not all busi-
nesses advertise. Some have become large and success-
ful with little or no advertising, while others have been
built largely by advertising.
Method of distribution. — The method of distribution
employed will have much to do with whether or not a
concern advertises. If a concern sells its goods under
the private labels of distributors (e.g., wholesalers or
chain stores), it will probably do little or no advertis-
ing; it is usually unknown to the consumers. Some con-
cerns distributing their products direct to the consumers
Advertising Principles and Policies 517
by salesmen do little or no advertising. On the other
hand, a concern may well advertise if it identifies its
product and has it sold to the general public.
Some manufacturers have depended very largely on
advertising to develop consumer demand and have made
relatively little use of salesmen. If the consumers de-
mand the product at the retail stores, the retailers will
stock it, and sales become almost automatic. The com-
pany needs few salesmen and may use brokers to sell
the wholesalers who supply the retailers.
Product. — The advertising policy depends to a con-
siderable extent upon the product. The product must
be branded or identified in some other way if it is to be
advertised, unless the advertiser sells it direct to the
user. There must be some feature or "talking point"
about the product if the advertising is to be successful.
Manufacturers of raw materials have often felt that
it was useless to advertise. Other producers had prod-
ucts of equal quality, and they felt that the business
went to the producer with the lowest price or the best
service. More and more producers of raw materials,
however, are coming to advertise. Some are identifying
their products so that they can secure the credit for high
quality. Others have come to realize that the demand
for their products is elastic, and they are advertising the
product to expand its consumption. Thus we see ad-
vertisements of various kinds of wood, wrought iron,
nickel, and sheet steel. These products compete with
other products and may have their use increased by
showing their advantages.
In order to secure something to advertise, producers
often develop specialties — products that are different
from other products. Thus a manufacturing company
made screw-nails, a steel manufacturer developed a rust-
518 Advertising Principles and Policies
resisting iron, a can company developed flake coffee, a
metal furniture manufacturer produced steel shelving
that would fit together without bolts, while a glass com-
pany introduced windows with two panes sealed together
with dehydrated air to stop heat losses.
Territory. — The company selling in a very limited ter-
ritory may feel that it can reach the buyers to better
advantage with salesmen than with advertising. Such
companies, however, often advertise in local newspapers,
or with direct-mail matter.
Financial strength. — Small companies, or new com-
panies started with limited capital, cannot afford large
advertising campaigns; some of them feel that for this
reason it is useless to advertise at all. This may be the
wrong attitude. Many of the outstanding businesses of
the country began advertising in a very small way, some
when they could spare only a few dollars. Many firms
attribute their growth largely to their advertising begun
on a very small scale. The small concern can usually
find some advertising method adapted to its needs — a
trade paper, local newspaper, a farm paper, direct-mail
matter, or a novelty.
What to advertise. — The first essential for successful
advertising is to have something to advertise. Adver-
tising without a definite article or service to offer is
wasted effort. We may advertise a new article, an im-
proved article, a superior article, an attractive price, a
definite service, or the reliability or dependability of the
article or the seller. The buyer must have some interest
in the product or service — it must meet one of his needs
or desires.
If the seller has several things for sale, he must decide
which product or service he will advertise and what
appeal he will feature. What can he advertise to best,
Advertising Principles and Policies 519
advantage? What will make the best appeal to the
buyers? What service does the product render to the
buyer? How does it serve his needs?
How much to spend. — Some successful businesses have
been built up on the policy of spending all that they
could afford on advertising. This may be a good policy
for a growing concern with a big market to develop.
When a company becomes large, or when the market is
covered, some other policy is usually adopted. The most
widely used methods of determining the advertising ap-
propriation are to base it on past or expected sales, or
to base it on the task to be done — results expected from
the advertising.
Sales. — Some companies set aside a certain percentage
of the past year's sales to be spent for advertising during
the coming year. A shorter period, as a half-year or a
quarter, may also be used. This is a very definite
method. It affords the easiest way of determining the
advertising appropriation. If sales vary from year to
year, this method, however, will cause different amounts
to be spent for advertising in different years. If the
company has a poor year and its sales are low, the
amount of advertising done during the following year
will be reduced; and this reduction may be poor policy,
for perhaps the following year will be a year when busi-
ness is improving and the amount of advertising should
be increased.
A somewhat better method is to set aside for adver-
tising a certain percentage of the expected sales during
the coming year. This method will tend to keep the per-
centage cost of advertising uniform. It will mean that
more is spent for advertising when business is good than
when business is poor. Some argue that the best time
to advertise is when people are in a buying mood. If
520 Advertising Principles and Policies
this be true, then advertising may well be based on es-
timates of future sales — provided such estimates can be
made with reasonable accuracy.
The task to be done. — Some argue that the amount of
advertising done should vary with the job the advertising
is expected to do. If new territories are to be opened or
new products are to be placed on the market, then more
must be spent on advertising. If business is poor and
yet the company wants to keep up its volume of sales,
it may spend more for advertising, as there is more sales
resistance. If, on the other hand, the product is estab-
lished on the market and no expansion of sales is
planned, the advertising appropriation may be kept sta-
tionary or it may be reduced. In many ways this appears
to be the most sensible and logical way of deciding how
much to spend for advertising. It must, however, be
modified at times to meet the financial ability of the
company.
When to advertise. — Some advertising men say that
the answer to this question is "all the time." The public
soon forgets. The seller who stops advertising often
finds that the buyers soon forget his product and buy
others that are being advertised. Continued, steady ad-
vertising produces results. The amount of advertising,
however, should often vary from one time to another.
Seasonal products can best be advertised in their sell-
ing seasons. When they are advertised out of season,
some special inducement, such as low price, is usually
necessary to induce the consumers to buy. One com-
pany selling an anti-freeze preparation for automobiles
arranged to place its advertising in the various cities
when cold waves were predicted by the weather bureaus.
When a new product is being placed on the market or
Advertising Principles and Policies 521
when new markets are being developed, more advertising
is needed than when the product is established on the
market. It is much harder to get a product on the mar-
ket than to keep it there.
A schedule should be prepared showing when the ad-
vertisements are to appear. The time for each adver-
tisement may be definitely fixed or the schedule may be
somewhat flexible to allow for seasonal developments or
changes in the weather.
Advertising and the business cycle. — Should advertis-
ing be increased when business is dull in order to keep
up sales? Or is it best to increase advertising when
business is good and people are in a buying mood? Ad-
vertising men differ on this question. Some argue that
advertising can increase sales, and therefore more adver-
tising should be done in periods of depression than in
periods of prosperity in order to keep up sales volume.
The majority, however, seem to feel that the best results
are obtained in good times, when people are in a buying
mood — that it is easier to "swim with the current" than
against it. Advertising apparently produces the best
results when goods are in demand, when people want to
buy.
Whether a company curtails or increases its advertising
in periods of depression depends somewhat on the phi-
losophy of the manager. One man says: "Business is
going to be poor; I had best economize and prevent
failure." Another says: "Business is poor, but I do not
want to go backward. Therefore I will put forth more
sales effort in order to keep up my sales." Increased ad-
vertising is often a part of the latter program, the success
of which depends in part on the nature of the products
sold and in part upon the enthusiasm and energy with
522 Advertising Principles and Policies
which the program is carried out. This policy may be
helped by the fact that competitors reduce the amount
of their advertising.
Where to advertise. — Advertising should be con-
centrated in the territory in which the product is to be
sold or among the customers to whom the product ap-
peals. Mediums should be selected that cover the desired
territory or that are read by the class of people who
are logical prospects. Market research often shows that
sellers try to cover too much territory — that in some
places sales are so scattered that they are unprofitable.
Advertising should not be done in such territories, un-
less, of course, the seller is definitely planning to develop
such territories into profitable markets.
Selecting the proper method. — The proper method in-
volves the selection of good mediums, good copy, and
alluring appeals. The selection of these will be dis-
cussed in the following chapters.
The advertising agency. — The advertising agency is a
functional middleman which helps advertisers with their
problems. It advises its clients as to the amount and
kind of advertising they should do; it often conducts
market research and prepares complete advertising plans
for them; it prepares their copy, secures the necessary
pictures, and has the plates made; it recommends or se-
lects the mediums that should be used; and it buys the
space and sees that the advertisements are published.
The agency was formerly a space broker for the pa-
pers, and is still paid a commission (usually 15 per cent)
by most of the magazines and newspapers on national
advertising. For advertisements in general mediums,
the advertiser must pay the same rate whether or not he
uses the agency's service. Therefore many advertisers
turn over much of the work to the agency, and they
Advertising Principles and Policies 523
themselves only formulate the general policy and pass
on the campaigns and copy prepared by the agency.
Agencies may also be employed to handle direct-mail
advertising or to perform extra services which are not
covered by the commission paid by the papers and for
which the advertiser pays the agency.
The agency maintains a staff of specialists and is much
better equipped to prepare good advertisements than is
the average small seller who does not maintain a com-
plete . advertising department. Some companies, how-
ever, prefer to make their own plans and prepare their
own copy. They feel that the agency does not fully un-
derstand their problems and their products. This is
especially true of technical products, for which reason
the publishers of some technical papers do not allow
agency commissions.
Planning. — The advertiser often plans his advertising
several months in advance. Often the amount to be
spent for advertising is determined for a six-months pe-
riod. This amount is divided by months, and the amount
to be spent each month is determined. Each month's
appropriation is then divided between departments or
products; each month's appropriation is also divided be-
tween newspaper, direct-mail, radio, car card, trade pa-
per, magazine, billboard, and other kinds of advertising.
(These various kinds of advertising are explained in the
next chapter.) Thus the amount to be spent in adver-
tising in each department of the business, each month,
and in each kind of medium is planned several months
in advance. The advertiser may also select the indi-
vidual periodicals to be used and the amount of space
to be used in each.
Although the advertising plans are worked out months
in advance, they should be sufficiently flexible that they
524 Advertising Principles and Policies
can be changed quickly to meet changes in demand. In
a retail store, the specific merchandise to be advertised
may be selected only a few days in advance. This is
often desirable because the popularity of different items
cannot always be accurately anticipated and the store
may want to push the sale of popular goods or to move
overstocks.
Chapter 32
Review Questions
1. What are the three principal methods of stimulating
sales?
2. Why do sellers advertise?
3. What are the limitations on advertising?
4. What advantages does a salesman have over advertise-
ments?
5. How may advertising influence the buyers?
6. What is the total annual cost of advertising in the
United States?
7. What are the principal advantages of advertising?
8. What are the principal objections to advertising?
9. Is advertising worth its cost to the consumers?
10. How does a concern's method of distribution affect its
advertising policy?
11. How does the product influence the advertising policy?
12. How does the territory covered by the seller influence
his advertising methods?
13. How do sellers determine how much to spend for ad-
vertising?
14. What is meant by basing the advertising appropriation
on the task to be done?
Advertising Principles and Policies 525
15. What do you think of basing the appropriation on the
sales of the past year? On the estimated sales for the coming
year?
16. Which should be advertised more extensively, a new
product or one with an established market? Why?
17. Where should advertising be done?
18. What is the relation of advertising to the business
cycle?
19. What is the advertising agency? What does it do?
How is it paid?
20. How should an advertiser plan his advertising? What
is an advertising schedule?
Thought Problems
1. What is advertising? Should we speak of radio "ad-
vertising" or radio "salesmanship"?
2. What is meant by the law of decreasing costs?
3. Sometimes we hear people say: "That's advertised
stuff. It's no good." Do you agree?
4. Dealers sometimes tell their customers that a non-
advertised product is a better value than an advertised prod-
uct, because no money has been spent for advertising it.
Comment on this statement.
5. What is the proper advertising policy in a period of
depression?
6. Should a small concern advertise?
CHAPTER 33
Advertising Objectives, Mediums, and
Appeals
Kinds of advertising. — Advertising may be classified
as to the purpose for which it is done, as to the mediums
used, and as to the appeals employed.
Purpose. — With respect to purpose, the three major
kinds of advertising are institutional, product, and price.
Institutional advertising is that advertising which at-
tempts to keep the name of a company or brand before
the public and build goodwill for its goods or services.
Institutional advertising is often used by manufacturers,
retail stores, banks, and public utilities.
Product advertising is done to promote the sale of
particular products. It features some article such as an
automobile, an electric fan, or a brand of coffee.
Price advertising is that advertising which attempts
to secure business on the basis of price. It is used by
many different kinds of businesses; among the larger
users are department, chain, and other kinds of retail
stores.
Methods of increasing sales. — Advertising may have a
number of specific purposes. Its fundamental purpose
usually is to increase sales, but it may attempt to do this
in a variety of ways. It may try to increase the use of
a product by lengthening the season in which the prod-
uct is used; thus Coca-Cola is advertised as a cold
weather drink, and ice cream is advertised as a year
526
Advertising Objectives, Mediums, Appeals 527
around food. It may be done to secure new uses for the
product ; thus yeast is advertised as a health food as well
as for making bread, and fans are advertised for ven-
tilating and heating as well as for cooling. Advertising
may be used to meet price cutting, to stabilize prices, to
increase the size of the sale, to expose unfair practices,
to prevent substitution, to reach markets too sparse to
be profitably covered by salesmen, to widen markets, to
develop new markets, or to put new products on the mar-
ket. Advertising may attempt to influence human con-
duct, as to get people to pay their debts, go to church,
drive carefully, obey the law, save money, contribute to
charity, or vote for a given candidate.
Mediums. — Advertising is often classified according to
the mediums used in reaching the prospective buyers.
The principal mediums are newspapers; magazines; pe-
riodicals reaching special groups of readers, as technical,
trade, farm, women's, and religious papers; direct-mail
matter; outdoor advertising, such as billboards and elec-
tric signs; radio; novelties, such as rulers, blotters, and
calendars; dealer helps, such as cards for display in the
dealers' stores and windows ; packages, as printed matter
and pictures on the packages in which the goods are sold
to the consumers; signs on delivery vehicles; and street
car cards.
Newspapers. — If the seller desires to reach the general
consumers in a given city or metropolitan area, the local
newspapers appear to be the logical medium. News-
papers in various towns can also be used in covering a
wider area, as a certain section of the country. News-
papers often have a lower rate per reader than do the
magazines. They can be used to cover the territory de-
sired and to some extent the type of people, as the dif-
ferent papers in a city are often read by different classes
528 Advertising Objectives, Mediums, Appeals
of people. The advertisements in newspapers in dif-
ferent towns can be timed to agree with the local buying
seasons or with the activities of the salesmen in these
towns.
On the other hand, there are certain disadvantages to
newspaper advertising. The newspaper is read hastily
and thrown away. An advertisement is said to have
less chance of being read in a newspaper than in a maga-
zine which is kept longer and read more leisurely and by
more people. In the past the grade of paper used by
newspapers limited the kind of pictures that could be
used. It has been very hard to bring out the beauty of
products needing color or accuracy of detail in news-
paper illustrations. This limitation is now partially
overcome in the rotogravure sections and color pages
used by many of the large papers.
General magazines. — Magazines of general circulation
are most often used by advertisers of products used by
the general public and sold over a large part of the
country. Products not used by the general public but
used by several different groups of buyers may at times
be advertised in magazines of general circulation. For
example, a product bought by contractors, carpenters,
plumbers, and machine shops may be advertised in such
magazines.
Specialized periodicals. — A product appealing only to
certain groups of people is likely to be advertised in
specialized publications. Thus, farm equipment is com-
monly advertised in farm papers, dairy equipment in
dairy journals, railroad equipment in railroad maga-
zines, canner's supplies in trade papers read by canners,
and equipment for chemical industries in the chemical
journals. Women's magazines are used by advertisers
of products used largely in the home, and the business
Advertising Objectives, Mediums, Appeals 529
papers are used by advertisers of office supplies and
equipment. The specialized paper offers the best ad-
vertising medium to a great many advertisers the use
of whose products is limited to certain industries or
trades.
Direct-mail. — Direct-mail advertising is sent through
the mail by the seller to prospects and is not published
in periodicals. Direct-mail matter may consist of let-
ters, circulars, pamphlets, booklets, folders, blotters, cata-
logs, or novelties. Direct-mail advertising can be used
to advertise almost any goods or service. It is used to
reach buyers of highly specialized products that cannot
be economically reached in other ways, and it is also
used to reach the general public. The manufacturer of
a highly specialized machine has only a few possible
users. He may feel that advertising even in the trade
papers involves waste ; therefore he reaches the users by
means of salesmen and direct-mail advertising. Such
advertising can be controlled and used to reach the exact
group of people who are prospective customers. Direct-
mail matter is also often used in the sale of ordinary
types of consumer goods (this may be done in the belief
that it is cheaper or gets better results than periodical
advertising), or it may be used to supplement the work
of salesmen.
If the mailing lists used in sending out direct-mail
matter are compiled with enough care, the advertiser
may reach only those people who are prospective buyers
of his product. In this way he can control the appeals
made to different groups. Further, his competitors do
not know the extent of his advertising.
Direct-mail advertising can be used very successfully
and profitably. However, it requires the constant at-
tention of the advertiser — there are no publishers to see
530 Advertising Objectives, Mediums, Appeals
that his advertisements are distributed. It requires work
to prepare the copy and mailing lists; to have the ma-
terial printed; to see that the matter is mailed at the
proper times; and to check up on the results obtained
from different mailing lists, pieces of copy, and types of
paper and printing. The results obtained from direct-
mail advertising can be checked much more closely than
the results of other kinds of advertising. In fact, direct-
mail advertising can be made almost an exact science.
The greatest objection to direct-mail advertising is
that so much material is thrown away without being
read that the cost of securing business in this way may
be high.
Outdoor advertising. — Outdoor advertising on bill-
boards, in electric signs, and on posters is very widely
used. The consumer may refuse to read the advertise-
ments in the papers, but some of the outdoor signs con-
front him at every turn so conspicuously that he cannot
help but see them. As people usually merely glance at
outdoor signs, their messages should be brief. Often
they consist largely of the name of a product or com-
pany, or of a picture with the name of the product.
Pictures are very good to visualize the product quickly
to the passers-by. As outdoor advertising is seen by all
classes of people, it is generally used for products gf
general consumption, such as chewing gum, automobiles,
gasoline, food, and amusements. It may be used by
both local and national advertisers.
There has been considerable agitation against outdoor
advertising on the ground that it spoils the natural
beauty of the country and that it increases the danger
of driving by obstructing the view of the drivers. Out-
door advertisers, themselves, have gone on record as
opposing the placing of advertisements at natural beauty
Advertising Objectives, Mediums, Appeals 531
spots or where they interfere with views of beautiful
landscapes, or where they increase the danger of driving.
Nevertheless, many outdoor signs are badly placed when
the beauty of our highways is considered.
Radio. — The radio has come to be a very important
"advertising" medium, costing many millions of dollars
annually. Radio advertising, or salesmanship, has many
problems. What types of programs are best suited to
different products? What is the value of the different
hours? How much advertising will the listeners per-
mit? Is it best to simply announce the name of the
advertiser as the sponsor of the program, or can a consid-
erable amount of advertising be interspersed with the
entertainment? Only a limited number of broadcasting
stations can be permitted on the air and each has only
a limited amount of time available for advertising.
Radio advertising appears to be especially adapted
to sellers of products with national distribution that are
used by the general public. It does not appear to be
adapted to technical products with limited markets. It
can, however, be used by local advertisers where local
stations are available.
Novelties. — Advertising novelties, such as paper-
weights, letter openers, watch fobs, caps, blotters,
yardsticks, recipe books, calendars, almanacs, and ther-
mometers, are widely used. The object is to place the
advertising message on something of value that will be
kept for a considerable time by the prospects. The calen-
dar, for example, is kept for a year and is looked at fre-
quently. Cheaper novelties are generally used for
distribution to the general public, while the more ex-
pensive articles go to large buyers — purchasing agents
and others in a position to place large orders. Novelties
532 Advertising Objectives, Mediums, Appeals
may be used by local advertisers, such as retail stores, or
as parts of national advertising campaigns.
Dealer helps. — Dealer helps consist of cards, posters,
display racks, and other matter for display in the stores
and windows of the retail merchants. The chief ad-
vantage of dealer helps is that they advertise the goods
at the place where they are sold to the consumers.
Dealer helps vary greatly in cost from those of moder-
ate cost to very expensive ones. If used by the retailers,
they stimulate sale of the manufacturer's products. The
greatest difficulty is in getting the dealers to use them.
Dealer helps are most often used by small neighborhood
stores in the cities and by the stores in the small towns
and villages. Many cards received by mail are thrown
away without being used and many cards put up by
salesmen are taken down soon after they leave.
In attempting to have their material used, some sellers
have their salesmen emphasize its importance; others
make a small charge for it. The price does not usually
cover its cost, but a dealer will ordinarily use what he
buys. Some manufacturers have emphasized the dealer's
goods in the cards and placed their own goods in the
background in order to induce the retailers to use the
material in their windows.
Packages and delivery vehicles. — Valuable advertising
is obtained by the labels on goods, on the packages in
which goods are sold, and on the vehicles of the sellers.
The color, design, size, and shape of the package serve
to identifiy the product when next the buyer wants to
purchase. New users are secured by the attractiveness
of the package.
Delivery trucks and salesmen's cars are used where
they are seen by many people and thus may supply a
valuable advertising medium.
Advertising Objectives, Mediums, Appeals 533
Car cards. — Cards in street cars and suburban trains
are widely used in the larger cities to advertise products
of general consumption.
Publicity. — Publicity is thought of by some as adver-
tising that is not paid for directly. Many activities of
business concerns have news value. The public is in-
terested in new and improved products, and in industrial
processes, methods, and machines. These may well find
their way into the news columns. Some people think
of publicity as underhanded attempts to get "inspired"
articles or propaganda into our papers, schools, and or-
ganizations. The author has no inteaition of defending
such tactics. There are, however, fair methods of se-
curing legitimate publicity.
Many companies make a practice of showing visitors
through their plants. This may be very excellent pub-
licity, for the visitors usually go away with favorable
impressions of the products and the producer. Other
companies have liberal policies in giving the press facts
about their business and their products. Some com-
panies have their technical men write articles for tech-
nical or business papers and deliver talks before schools
and conventions; others prepare films (which are loaned
free for educational meetings) showing the processes in
their plants. The company with an open policy in regard
to giving out news may secure much valuable publicity
for itself and its product.
Selection of proper mediums. — Conditions and prod-
ucts vary, but advertising methods can be found that
are adapted to practically all situations.
The neighborhood store. — A neighborhood store in a
city cannot afford to advertise in the city papers. Most
of the readers live too far away from the store to be
prospective customers. To advertise in the papers would
534 Advertising Objectives, Mediums, Appeals
mean paying for a large waste circulation. The store
may, however, compile a mailing list of the people in its
neighborhood and use direct-mail advertising. It may
use handbills or novelties. It may use such outdoor
advertising as electric signs, posters, or billboards on or
near its store. At times neighborhood papers are avail-
able. Cooperative advertising often enables the neigh-
borhood stores to advertise economically in the city
newspaper. One neighborhood store cannot afford space
in the city paper, but if 50 or 100 stores1 located in
various parts of the city advertise together, the cost to
each is relatively small. It is, of course, necessary for
all of the merchants to carry the advertised goods at
the advertised prices, which usually involves some agree-
ment on buying. This form of cooperative advertising
has had its largest growth among the "cooperative
chains" in the grocery field.
The village store. — The local village merchant is often
without a suitable newspaper covering his territory. He
may use direct-mail matter and outdoor posters. A
method that is at times very successful is for the mer-
chant to issue periodically (perhaps weekly or monthly)
a paper, or house organ, which he mails to the people in
his trade territory. This paper may contain advertise-
ments of his goods, personal news items concerning his
customers, jokes, and other reading matter. Direct-
mail matter may include folders, circulars, booklets,
catalogs, and personal letters. The merchant may send
picture postcards to all the children in the neighborhood
when he is away on a trip. These postcards contain
no advertising and are purely goodwill builders. One
merchant writes personal letters to his customers at every
1 The number of stores necessary will of course vary with the size
of the city.
Advertising Objectives, Mediums, Appeals 535
opportunity. Letters of congratulation go out when the
boys and girls graduate from high school, when young
folks get married, when babies are born. Letters of
sympathy go out when deaths occur. Personal sales
letters are used more or less continuously. Purchases
of clothing are solicited from the high school seniors
shortly before graduation. The merchant keeps a list
of his customers' purchases. He knows just about when
Jones needs a new overcoat or a new suit of clothes. If
Jones fails to come in, a sales letter is sent to him.
The appeal. — To be successful an advertisement must
appeal to the buyer. It must interest him and show
him why he should buy the product or service. Better
quality, lower price, better service, longer life, greater
safety, easier operation, a distinctive feature, or an im-
proved method of operation may furnish an appeal.
Buying motives. — The appeal must suit the buyer.
Advertisements should be written from the buyer's point
of view. The buyer's interest in the advertiser is due
solely to the fact that the advertiser has something which
he wants. The fact that the advertiser has something
he wants to sell is of no interest to the buyer. The fact
that the advertiser needs money interests the buyer only
because he is making a concession in price. It is just
as important for the advertiser as for the salesman to
talk from the buyer's point of view. The advertiser
should prepare his advertising to appeal to definite buy-
ing motives. The fundamental buying motives were
listed in Chapter 27.
Ordinarily it is better to make only one appeal in one
advertisement, or to devote most of the space to one
appeal and to mention the others more or less inci-
dentally.
536 Advertising Objectives, Mediums, Appeals
Positive appeal. — A positive appeal is usually better
than a negative appeal. We like- the pleasant better
than the unpleasant. For example, an advertisement
showing a woman dressed in her good clothes and reading
a book while operating a washing machine produced
much better results than the advertisement showing a
poorly dressed and tired woman toiling over a hot wash-
tub. The suggestion of the hot washtub was unpleasant.
The woman wanted the leisure. The husband wanted
to see his wife freed from the drudgery.
Fear. — It has been said many times that the advertiser
should not appeal to fear. Nevertheless the fear appeal
is used in advertising many such products as insurance,
safes, tire chains, watchmen's clocks, burglar alarms, and
so forth.
Buying motives illustrated. — We may buy oranges be-
cause we like them or because we think they are health-
ful— contain valuable vitamins, mineral salts, or acids.
The appeal may be directed to any or all of these
motives.
The seller of correspondence courses of instruction
asserts that his courses enable the students to secure
better positions and increase their incomes. This is an
appeal to gain or profit. Other motives are also used.
The advertisement may show how the increased income
enables the student to give his wife or children more
comforts and luxuries, and so appeal to his affection.
The advertisement may appeal to the student's pride
by showing how the course of study enables him to
secure promotion before the eyes of his present associates.
A manufacturer of oil heaters may show a picture of
a small, well-dressed woman with a large scoop in her
hands shoveling black, dirty coal into a furnace. The
caption may read: "Does your wife have to do this?"
Advertising Objectives, Mediums, Appeals 537
This appeal is aimed at the husband's affection. If the
manufacturer tells how his furnace needs no attention,
he may be appealing to the man's desire for leisure. If
he tells how the thermostatic control gives an even heat
at all times, he appeals to the desire for comfort and
health. If he tells how the oil heat is cleaner than coal,
he appeals to both affection and gain (economy). The
wife is saved from much drudgery in cleaning, and the
cost of cleaning, repainting, and repapering is reduced.
If he tells how the furnace removes coal and gives a
clean basement, he may appeal to pride, affection, or
economy. The picture may show the proud owner show-
ing guests his clean basement, or the lovely playroom
for the children that can be placed in the basement.
Such positive appeals may be better than the negative
appeal involved in the idea of a dirty basement.
Home ventilating fans were formerly advertised to get
fresh air into houses or to keep them cool. Then one
seller got the idea of advertising that they remove the
odors from the kitchen. Here was a new appeal and one
that was very effective with people who liked fish, corned
beef and cabbage, onions, sauerkraut, or other foods
with strong odors.
The seller of mechanical refrigerators may advertise
lower temperatures and better protection of foods. He
may advertise that there is no iceman to make dirty
tracks on the kitchen floor. He may show the incon-
venience of being away when the iceman calls and so
having no ice in the refrigerator. He may advertise
controlled temperatures which do not vary with the
outside temperatures and the amount of ice in the re-
frigerator. Again, he may show the cleanliness and
beauty of his product, and he may appeal to pride by
showing the admiration of visitors.
538 Advertising Objectives, Mediums, Appeals
Chapter 33
Review Questions
1. What are the major purposes of advertising?
2. For what specific purposes may advertising be done?
3. What are the principal advertising mediums?
4. When should the advertiser use newspapers?
5. What are the principal advantages and disadvantages
of newspapers as advertising mediums?
6. What types of products should be advertised in gen-
eral magazines?
7. Why are specialized periodicals used? Name various
kinds of specialized periodicals.
8. What is meant by direct-mail advertising?
9. What are the advantages of direct-mail advertising?
10. What type of products can be advertised direct by
mail?
11. What are the disadvantages or limitations on direct-
mail advertising?
12. What is meant by outdoor advertising? What are its
advantages from the advertiser's viewpoint?
13. What types of products can be successfully advertised
out of doors?
14. What can you say of radio "advertising"?
15. What are advertising novelties? Why are they used?
16. What is meant by dealer helps? Why are they used?
17. What problems arise in the use of dealer helps?
18. What can you say of the value of packages for adver-
tising purposes?
19. Do you believe that advertising on delivery vehicles
is valuable?
20. What can you say of car cards as an advertising me-
Advertising Objectives, Mediums, Appeals 539
dium? What type of products can be advertised on car cards?
21. What is publicity? How is it obtained?
22. How can a neighborhood store in a city advertise at
a reasonable cost?
23. How may a merchant in a small village advertise if
he does not have a newspaper covering his trade area?
24. What is meant by the appeal in advertising?
25. What is meant by a positive appeal? Is it better than
a negative appeal? Why or why not?
26. Does fear make a good appeal? Why?
27. What should the advertiser do when his product has
several appeals?
28. What appeals may be used in advertising ventilating
fans? oranges? oil heaters? electric refrigerators?
Thought Problems
1. Many people say that the billboards should be abolished
to enhance the scenic beauty of the country. How about it?
2. Do you think that novelties make a good advertising
medium? Why or why not?
3. What types of radio programs are most popular?
What percentage of the time in radio programs should be
devoted to advertising and how much to entertainment?
4. It is said that direct-mail advertising is scientific, or
can be made so. What is meant by this statement? Do you
agree?
5. Can successful advertisements be based on fear? Se-
lect "fear" advertisements from current periodicals and tell
which you think are good and which you think are bad.
6. Make a list of the chief buying motives and select two
advertisements from current periodicals that appeal to each
motive. (Paste each advertisement on a sheet of paper and
write the appeal below and hand in.)
7. What appeals would you use in advertising the follow-
540 Advertising Objectives, Mediums, Appeals
ing products: metal furniture for the home? pre-fabricated
houses? pancake flour? railroad passenger service? bonds?
garden seeds? ice cream? milk? computing machines? farm
implements?
8. Select advertisements illustrating institutional, prod-
uct, and price advertising. (Paste on paper and hand in as
suggested in Problem 6 above.)
CHAPTER 34
Preparing Advertisements
Attention. — The first problem in preparing advertis-
ing is to get the advertisement read, so that the message
gets to the readers. Attention may be secured by Size,
Position, Layout, Illustration, Headline, Color, Copy,
and Shape.
Size. — A large advertisement will attract more atten-
tion than a small advertisement. It is said, however,
that the attention value of an advertisement does not
increase in proportion to its size. Thus a half page ad
will be read by more people than a quarter page ad, but
it will not be read by twice as many people.
The advertiser fixes the amount to be spent in a given
paper during a certain period. He may decide to use a
few large ads or several smaller ads. On a given day, he
may use one large or several small advertisements. In
the past many department stores have used full page
ads. A store may, however, use several small ads to
feature different articles rather than one large ad. The
one large advertisement economizes on space in that only
one signature (name) is needed, and hence a larger per-
centage of the space can be used for illustrations and
description of the goods. Readers attracted by one arti-
cle may have their attention called to others. On the
other hand, the small advertisements appear on different
pages and in different positions and, taken all together,
may be read by more people than the one large advertise-
ment.
542 Preparing Advertisements
The size of the advertisement is often influenced by
the kind or number of articles to be advertised and the
appeal to be made. If a large picture or a piece of long
copy is needed, the ad will probably be larger than if
only a small picture or a short message is needed. In
many instances, however, the size is first determined, and
then the copy is prepared to fit the space. The size of
the type may be varied to get the message into the space
available. The advertiser must often choose between
having his copy set in small type and shortening his
message so that larger type can be used. The number
of people reading the advertisement increases with the
size of the type used.
The majority of newspapers have a column 2 inches
wide. Many papers have a page 8 columns wide and
21 inches long. The size of page varies somewhat
between papers, but a full type page of 161/) x 21 inches
is common. The extra half inch in width comes from
the width of the seven rules (lines) separating the col-
umns. A half page ad is thus lO1/^ x lO1/^ inches, or
8% x 21 inches. The latter may be referred to as a four
column ad. A quarter page ad is ordinarily 8Vi x 10%
inches.
Shape. — The correct shape for an advertisement has
been said to be a rectangle with a proportion of 5 to 8.
Thus an ad 2 columns wide (4 inches) should be approxi-
mately 6a/2 inches long. This shape has been said to be
best adapted to the human eye. Letterheads, books,
and many magazines have pages of about this propor-
tion. The ordinary newspaper page varies slightly from
this shape, as it is a little too wide for its length. It is
often desirable to use ads that do not have the 5 to 8
ratio because of the shape of the illustration needed or
to gain in attention value. If an advertisement is to
Preparing Advertisements 543
illustrate clothing on the human figure, a longer and nar-
rower ad may be desirable. On the other hand, if an
illustration of a railway train or landscape is to be used,
a wider and shorter advertisement may be preferred. A
long, narrow ad, perhaps one column long and one col-
umn wide (2x21), may have excellent attention value
because, if placed alongside reading matter, it has much
opportunity to attract the reader's attention.
Position. — In the case of a magazine, the front and
back covers have the greatest attention value. The in-
sides of the covers come next. Ordinarily the publisher
charges more for advertisements in these positions than
for those on inside pages.
The best position on a page is the upper left-hand
corner, as we begin reading in that corner. The point of
greatest eye value on a page is above and to the left of
the center. The preferred position on a page is in the
upper left-hand corner fully surrounded by reading
matter. Many publishers refuse to sell this position,
and others charge a higher rate for it. If this position
is unobtainable, the advertiser likes a position at the
right or bottom of the page with reading matter
touching two sides of his ad. After this comes a position
with reading matter on one side. The poorest position
on a page is on the bottom or right-hand side, separated
from reading matter by other advertisements. An ex-
ception to this may occur in the case of advertisements
which are in the nature of announcements. A want ad
offering household furniture for sale may best appear
among other ads offering similar goods. People inter-
ested in buying second-hand furniture will be more
likely to read the ad in this position than if placed else-
where. The theater may want its ad among the other
amusement ads, for a person interested in attending a
544 Preparing Advertisements
theater looks for the theater ads and is likely to overlook
one appearing in another position.
The advertiser must ordinarily take his chance of re-
ceiving a good position or must pay a higher rate for a
preferred position. Publishers do not like to promise
preferred positions, as it complicates the "make-up" of
their papers.
The advertiser likes his advertisements to appear on
pages with popular reading matter or with matter that
is likely to be read by the class of prospects to whom he
appeals. A sporting goods store wants its ad on the
sporting page, while the investment house wants its ad
on the financial page.
The layout. — The layout man plans the advertisement
just as the architect plans the building; he is largely
responsible for its physical appearance. He is ordinarily
furnished with the size of the ad, a list of the articles to
be advertised, the prices, the appeal, and perhaps the
illustrations and copy to be used. His first task is to
divide the space between the illustrations, the headlines,
and the copy.
He takes a piece of paper and rules it off the size and
shape the ad is to be, and then divides the space between
the illustrations, headlines, and copy. He plans the ar-
rangements of the ad. He determines the size and posi-
tion of the illustrations, the size of the type to be used
in the headlines, the amount of white (blank) space, and
the space and positions to be used for the copy. He
often letters in the headlines, and blocks in the space to
be used by illustrations and copy. He may paste copies
of the cuts in their proper places. He thus gives the ad
its first definite appearance.
The layout should call attention to the message and
get the advertisement completely read. If it calls atten-
Preparing Advertisements 545
tion to the layout, it is bad.1 The advertisement should
not be too black, rfor should it leave too much white
space. Some layout men strive for balance. Balance
is determined by the sizes of the various parts of the
ad, their distance from the center, and their tone. Tone,
for example, means that a smaller space filled with black
faced type balances a larger space filled with light faced
type. Some layout men emphasize eye direction — the
reader's eye is directed from point to point in the ad in
the order in which the advertiser wants his message read.
The eye may be directed by the position of the illustra-
tions, by the armngement of the headlines and copy, or
by lines or arrows.
Illustration. — Pictures are the universal language.
They are often the most important part of an advertise-
ment. A suitable picture gives the reader the idea at
a glance. It requires very little mental effort to look at
and understand the ordinary picture. On the other
hand, it does require mental effort to read and under-
stand copy. A picture makes an idea clearer than a long
description. Even a well-written description may give
the reader only a hazy idea of a machine, a building, or
a new product, but a picture or diagram of the product
gets the idea over much more quickly and accurately.
The picture of the neat little woman shoveling dirty coal
into a furnace got the idea over much better than it
could have been done by words alone.
The use of pictures is limited by the fact that many
products are so well known that their pictures no longer
give information or attract interest; that the buying
1 The author is indebted to Robert Martin, art director of R. H.
Macy & Co., for some of his points of layout and illustration. See
his article "Layout and Art," in "Retail Newspaper Advertising/*
published by The New York Times.
546 Preparing Advertisements
motives are hard to picture ; and that it is hard to repro-
duce fine pictures in newspapers. Coal, lumber, potatoes,
cornflakes, and bread are so familiar that their pictures
attract little attention. They are used in advertisements
perhaps as much for identification as for any other
reason.
Securing illustrations. — Illustrations may be obtained
from drawings or photographs. There are many kinds
of drawings, adapted for different products and for mak-
ing different kinds of cuts. For newspaper advertise-
ments, the simple line drawing is best. From this a
zinc etching is made. This prints well on the kind of
paper and with the ink used by newspapers. The disad-
vantage of the line drawing is that it cannot show
details; the fine texture of fabrics is entirely lost in such
drawings. Photographs have many advantages. They
show the details, and they are accurate and convincing
— "The camera never lies." On the other hand, they
involve expense for retouching and engraving and often
do not show up well when reproduced in newspapers.
The advertiser may employ an artist to make drawings
if no one on his staff is capable. He may take the photo-
graphs himself, employ a professional photographer, or
purchase suitable photographs from companies that
supply photographs for advertisements. These concerns
may use professional actors to pose for the photographs.
If an advertising agency is used, a part of its work is to
secure the illustrations.
In practice, the individual advertisers often secure
their cuts from the manufacturers of the products adver-
tised, from companies in the business of supplying cuts,
or from the newspapers who subscribe to mat services.
The headline. — The purpose of the headline is to catch
the reader's eye, attract attention, and get the advertise-
Preparing Advertisements 547
ment read. One writer 2 says that the three best types
of headlines are: first, those that appeal to the reader's
self-interest — offer him something he wants; second,
those that give him news; and third, those that arouse
curiosity.
This headline appeals to the reader's self-interest:
ANOTHER $100 RAISE
This headline gives news :
NEW FEATURES ON THE BLANK CAR
These headlines arouse curiosity :
WHAT'S WRONG WITH THIS PICTURE?
THE TROUBLE WITH MANY MARRIED
MEN Is. ...
An insurance company tried these two headlines:
HERE'S ONE QUESTION You SHOULDN'T
ASK YOUR WIFE:
You CAN LAUGH AT MONEY WORRIES IF
You FOLLOW THIS SIMPLE PLAN
The second advertisement secured twice as many in-
quiries and sold four times as much life insurance as the
first one. By merely reading the headline and name in
the second advertisement, the reader learns that the
Blank Life Insurance Co. has "a plan that will enable
him to end money worries," Headlines that make an
offer get a message over to those who read only the head-
lines.
3Caples, John R., in Advertising and Selling, June 25, 1930.
548 Preparing Advertisements
Color. — Color is of great value in attracting attention.
Bright colors attract attention more readily than dull
colors. The contrast of almost any color on the ordinary
black and white page, however, attracts attention. Color
is also of great help in illustrating many products, espe-
cially products with distinctive colors, such as oranges,
roofing, textiles, garments, floor coverings, and automo-
biles. The attractiveness of many products is greatly
enhanced by illustrating them in their real colors. Con-
sider, for example, the illustration of a dress in black and
of the same dress in its true colors. Colors may also be
used to suggest the product sold. Thus red is used in
advertising heating devices, green for cooling products,
and yellow for gala occasions.
The principal limitations on the use of color in adver-
tising are its added cost and the fact that it is not avail-
able in many newspapers. To secure the desired results
often requires three or more colors and a high grade of
paper. This means greatly increased costs. If possible,
the advertiser should keep records of the results obtained
from black and white and color advertisements, and
determine whether or not the use of color is profitable.
This is easily done by mail-order sellers and can be done
in other forms of advertising by the use of "test" ads.
Copy. — Copy is that part of the advertisement involv-
ing the use of words. It includes the text or message
and also, strictly speaking, the headline. Often the lay-
out is made and then the copy is written to fit the space ;
for example, the layout man may say that a certain
article must have a headline of 50 letters and a message
of 100 words. The copy writer naturally objects that it
is very hard to tell the story or describe an article in
a definite number of words. It may be remarked, how-
ever,, that the poet and the music composer must also
Preparing Advertisements 549
write to very definite specifications.3 At other times the
copy may be written first and the size of the ad and its
layout adapted to the copy. This method allows the
copy writer a freer hand in developing the theme or sales
talk.
To write good copy, one needs to be familiar with the
merchandise and with the attitude of the buyers. The
buyers are interested in facts. The copy writer, there-
fore, needs to study the goods, to find out the pertinent
facts about them, to find their talking points or appeals,
and to put this information and the prices in the ad. In
a large store, the main facts about the goods are sent to
the advertising department by the sales departments.
The copy writer, however, often needs to know more
about the goods, and hence must study the merchandise
sold by the store.
The copy writer needs to know the consumers, for the
copy should be written from their point of view. The
copy writer should study the consumers and associate
with them as much as possible. He should be able to
reflect the "spirit of the times." Most retail adver-
tising is read by the women, and so the copy writer
needs to understand the woman's point of view. For
this reason women are often employed as copy writers.
If the goods are bought by farmers, the copy should be
written from their point of view. If the goods are bought
by mechanics, the copy should be written for them.
Writing copy. — The same rules of grammar and rheto-
ric apply in writing advertising copy as apply in writing
other material. The writer should have something to
say and should then proceed to say it in a way that will
3Swensen, Dorothy E., Advertising Mamager of Abraharfl & Straus,
Inc., in "Retail Newspaper Advertising," published by The New York
Times.
550 Preparing Advertisements
interest his readers. The language should be simple,
clear, and adapted to the readers for whom it is intended.
Short sentences are usually best. Most of the sentences
should be under 17 words in length. On the other hand,
a large number of consecutive sentences less than ten
words in length makes the copy monotonous, especially
if the copy is long. The style must be adapted to the
education and intelligence of the readers for whom it
is intended.
Short and simple words are preferred. Hotchkiss says
that words should be correct, should be correctly used,
should be simple, should be exact, should be euphonious,
should have the proper degree of dignity, and should
have the right atmosphere. It is often impossible to
secure a word that meets all of these requirements. One
requirement may have to be sacrificed to get a word that
meets the other requirements. Slang should be avoided,
and yet a slang word may sometimes be used because
it expresses the idea to a certain class of people. A
French word may be used in advertising toilet prepara-
tions to secure the proper atmosphere, even though it
is not a simple word nor generally understood.
A few examples. — The advertisement reproduced as
Illustration A appeared in a magazine read by adver-
tisers. The headline tells us that "Oakland Women Are
Spenders." This means that Oakland would be a good
place to advertise. The signature at the bottom of the
ad stands out and tells the reader how he can reach
these women. The ad makes a somewhat unique use
of a border. One adverse criticism of the typography
of the ad is the fact that the names of the towns where
the representative has offices are .so large that the name
of the representative does not stand out as it would if
smaller type had been used for the names of the towns.
OAKLAND TL J
not mean
they are wastefully ex'
travagant, but does mean
that in department, dry
: goods and vaViety stores,
they annually expend a sum exceeding
$35,800,000, according to the United
States Department of Commerce.
Of this large total, $32,OOO,OOO is
spent for purchases made in the
department stores, while $3,7OO,OOO
goes to dry goods, general and variety
stores.
Local merchants have found it profitable
to concentrate their sales efforts in The
TRIBUNE. National distributors find it
good policy to follow their example.
National Advertising Representatives:
WILLIAMS, LAWRENCE t* CRESMER CO.
Los Angeles San Francisco New York
Chicago Seattle
Illustration A
551
552
Preparing Advertisements
Those interested sufficiently could be depended upon
to read the address in smaller type. The three sentences
average over 25 words; perhaps the class of readers jus-
tifies sentences of this length.
Q!
C^S
Ol
NO!
YOU ARE NOT
planning an extravagance, when you
plan your New York trips in terms of
The Waldorf-Astoria. Everything has
been lifted to a new high except the
rates, and those start where they did
in the oltf Waldorf ... $6 the day.
Illustration B
The advertisement reproduced as Illustration B is en-
closed with a black border and has sufficient white space
to attract attention. The heading appears perpendicu-
larly on the page. This is done to attract' attention by
the novelty of the arrangement. Is this a desirable lay-
value, satisfaction • • • plus liberal accommodations
and
BRUCEWOOD SHOES
reduced for stock
adjustment to
It's very rarely we reduce our fine stocks
of women's shoes, but when we do it
means phenomenal savings. There's a
vast selection in all styles and all sizes but
not every style in every size— our own
regular $6.50 and $7.50 shoes reduced
to $4.95
TOMORROW AT 8:45
Maurice L Rothschild
State at Jackson
Illustration C
553
554
Preparing Advertisements
out? Do the stars add anything to the advertisement?
The advertisement shown as Illustration C occupies
2 columns by approximately 8 inches. The large type
tells us that reduced prices are offered on shoes at
ilftlj;
! / ';
;
tit' for i , '
;, : . .; v;
III b 'big
'r.'^if I
'^jiL^s^i^'
^
v x^L^Lkll:^.,.'. L,.1: fcii!^' & -i.u ' i •• « " ito*^ ' w/i)
DIEBOLD
For
Illustration D
HEADQUARTERS
FOR
SUCCESS
Successful business men ap-
preciate the need for modern
comfort and convenience
when they travel. And so, al-
most invariably, they stop at
The Benjamin Franklin when
in Philadelphia • For The
Benjamin Franklin is Phila-
delphia's modern and con-
venient hotel. 1200 big com-
fortable rooms. Food that
tempts the most travel-har-
assed appetite. Service that
soothes travel-jarred nerves.
Rates that fit every travel
budget, as low as $3.50 a day
•Try The Benjamin Franklin
yourself the next time!
THE
BENJAMIN
FRANKLIN
SAMUEL EARLEY, Managing Director
PHILADELPHIA
Here you
are, men!
Here is
a real drink I
It's India Tea!
And please, don't
confuse it with
ordinary tea. It's
different! Decidedly so! It's none of
those weak, watery drinks. It's a bev-
erage with "heft". . . with full, rich flavor
and satisfying strength.
India grows the finest tea in the world.
India Tea, piping hot, is one of the
world's finest drinks.
At luncheon, ask for India Tea.;. and
to be sure you get the genuine, look for
the Map of India trademark (above) on
the tag on the teaball served to you.
At home, ask the little manager to serve
India Tea. Tell her (if she doesn't already
know) to look for the Map of India on
the label of every package of tea she
buys. It certifies the genuine!
Illustration E
Illustration F
555
556
Preparing Advertisements
Maurice L. Rothschild's. This is a price advertisement.
Do you feel that it is neat for a price advertisement?
Is there plenty of white space? What do you think of
the choice of words?
The advertisement reproduced as Illustration D
appeared in a magazine which is read mainly by well-
educated people. The un-
usual heading attracts at-
tention. Curiosity as to
who is making a quick get-
away with a gun in his
hand prompts us to read
the copy. The advertise-
ment uses a novel idea of
selling safes by addressing
the messages to robbers.
The copy contains five sen-
tences with a total of 75
words, or an average of 15
words each. The length
varies from 27 words in the
first sentence to 5 in the
last. Is the first sentence
too long? Note the choice
of words and how the words
in the first sentence blend
Illustration G with the headline
Illustration E shows another hotel advertisement.
This is a single column ad from a popular magazine.
It makes an appeal to success, implying that if you stop
at this hotel you will .associate with successful people
and gain prestige. It uses some long words, but as it
does not appeal to the ignorant and uneducated, this
is probably not a disadvantage. What do you think
type
is like a violin. In the
hands of the master it
becomes a singing, sen-
sitive thing. It hums
with color. It sparkles
with life. Our friends
have often called us
Masters of Type.
Louis A.UEPIS, INC.
Fine Typography
228 E. 45th St., New York
VAnderbilt 3-8874
Preparing Advertisements 557
of the following phrases: "travel-harassed appetite" and
"travel- jarred nerves"?
Illustration F is a single column advertisement pre-
sented for its copy. The trademark appears prominently
so that the reader knows at once that the ad is about
India tea. Next is a picture of a man. Women are
supposed to be the principal tea drinkers. This ad is
addressed to men for the purpose of inducing them to
drink tea. Do you feel that the copy will secure action?
Illustration G is reproduced as an example of copy.
The seven sentences average less than seven words each.
What do you think of the choice of words?
Chapter 34
Review Questions
1. How may an ad secure attention?
2. What are the relative advantages of using one large ad
as contrasted with using the same amount of space for several
small ads?
3. What factors influence the size of an ad?
4. What has been said to be the correct shape for an ad?
Why are ads of other shapes used?
5. What is meant by the position of an ad? What is the
best position in a magazine? In a newspaper?
6. What position would you want for a small ad offering
a house for rent?
7. What is meant by layout? How does the layout man
plan the appearance of an ad?
8. What is meant by balance in an ad? By eye direction?
9. What is the value of pictures in advertisements?
10. What limits the use of pictures in advertisements?
11. What kind of illustrations are best for newspapers?
558 Preparing Advertisements
12. How does an advertiser secure illustrations for his ads?
13. What is the purpose of the headline? What are the
best types of headlines?
14. What is the value of color in advertising?
15. What limits the use of color in newspaper advertising?
In direct-mail advertising? In magazine advertising?
16. What is meant by copy?
17. Should the copy be written before or after the layout
is made?
18. What are the qualifications of a good copy writer?
19. What rules should be followed in writing copy?
Thought Problems
1. How can an advertiser determine whether it is worth-
while to pay for preferred positions? For color?
2. Clip advertisements from current newspapers or maga-
zines illustrating a good use and a poor use of each of the
following: layout; illustration; color; headline; copy.
3. Prepare the copy and make the layout for the follow-
ing advertisements to appear in newspapers:
(a) A new arrival of fashionable men's oxfords to be sold
at $6.50. (Size: 2 columns by 9 inches.)
(b) Baseball equipment to appear in the early spring.
(Size: one quarter page.)
(c) Fishing tackle and supplies to appear during the
summer vacation. (Size: 27 column inches.)
(d) A clearance sale of ladies' winter coats, marked down
from $45 to $22.50. (Size: not to exceed one-half page.)
(e) Electric fans. Ad to be prepared in advance and
run during the first heat wave of summer. (Size: 2 columns
by 6 inches.)
(f) A special sale of ladies' dresses, special value on a
new purchase, to be sold at $17.50. .(Size: one-quarter page,
any shape.)
Preparing Advertisements 559
(g) A spring ad of seeds and garden supplies, to appear
in a small town paper. (Size: not to exceed 28 column inches.)
4. Prepare direct-mail advertising for the following prod-
ucts :
(a) A leather handbag at $7.95.
(b) Real old-fashioned hickory-smoked Virginia hams,
cured and offered for sale by a farmer in Virginia.
(c) Genuine Vermont maple syrup offered for sale by an
association of producers.
(d) Saturday specials of a neighborhood grocery store.
5. What position in a daily newspaper would you want
for an ad offering a cookbook for sale? What position
would you want for an ad of golf clubs? For an ad of
groceries?
CHAPTER 35
Business Ethics
Business ethics defined. — By business ethics is meant
the application of the basic principles of right action
to business relations; in other words, the application of
the Golden Rule to business.
Improvement in ethical standards. — There have been
times when the ethical standards of business were very
low. For centuries traders were thought of as cheaters.
It was supposed that in a trade one party had to cheat,
or get the better of, the other party. As recently as 35
years ago, adulteration of goods was said to have been
very common.
Business is now recognized as a thoroughly honorable
vocation. It is now recognized that both parties can
and usually do gain in a trade. It is only those trans-
actions in which both parties do not gain that are to be
condemned.
A great improvement in business ethics, particularly
during the past quarter of a century, has taken place.
Some of the evidences of an improvement in ethical
standards are the high degree of honesty in advertising;
the right of the buyer to return goods; the "customer is
always right" attitude and the one-price policies followed
by many retail stores; and the relatively small amount
of adulteration in advertised and branded goods.
John Wanamaker — in the operation of his stores in
Philadelphia and New York — was one of the leaders in
improving the standards of business practice. His state-
sec
Business Ethics 561
ment in regard to ethics is therefore interesting. "The
temptations of business are great, and unless a merchant
has more than a creed or the ordinary groundwork of
honesty and faithfulness, he may be caught by the
sudden wind of plausible opportunity and tumble over
the precipice and be ruined. ... I am glad to stand
up and say that religion is the only investment that
pays the largest dividend possible to receive/'
A great many business men are honest and conduct
their businesses on high ethical planes. There are
some, however, who are unscrupulous and dishonest and
who try to take advantage of both their customers and
their competitors. It is often very hard for honest men
to meet such competition without resorting to dishonest
practices, and many business men who really want to
conduct their businesses along honest lines feel that they
must be dishonest in order to stay in business. It is,
for this reason, especially desirable that rules and agen-
cies be established to restrain the dishonest and un-
scrupulous and force them to behave or quit business.
Need for rules and umpires. — Business needs rules
just as much as football and baseball. Business ethics
and codes of fair and unfair practices give a list of rules
for fair and honest business conduct. Business needs
umpires to enforce the rules just as do ball games. We
are continually striving to introduce into business a
spirit of sportsmanship. We are hoping to change the
motto that "business is business/' which is ordinarily
understood to mean that anything is fair in business, to
a feeling that business should be conducted according
to the highest principles of truthfulness and honesty.
Agencies. — The work for higher ethical standards in
business has been promoted by several different kinds
of organizations. First, there are organizations of busi-
562 Business Ethics
ness and professional men, such as trade associations,
professional societies, chambers of commerce, advertis-
ing clubs, and service clubs, such as Rotary, Kiwanis,
and Exchange. Second, there are the Better Business
Bureaus. Third, there is the Federal Trade Commis-
sion, an independent commission of the national Gov-
ernment in Washington. These agencies, working under
the supervision of the courts, may be called the umpires
of business.
Codes of ethics. — The organizations of business and
professional men carry on agitation and education for
the promotion of better ethics. A common practice is
for them to meet in conventions and draw up and adopt
codes of ethics which set forth the practices which they
consider ethical and those which they consider unethi-
cal. Although codes of ethics are often violated, they
seem to do much good. Many people will follow them,
and they afford the opportunity for publicity and call
the attention of the men in the trade to the practices
considered wrong. Public opinion in the trade can ac-
complish much. Control of business practices by the
men in business is referred to as self -regulation.
As a rule, we think of ethics as setting a standard of
conduct higher than that required by law. A man who
obeys the law is a law-abiding man, it is true, but an
ethical man does more. He lives up to standards of
conduct higher than those contained in the law.
A danger of codes of ethics drawn up by men in a
trade is that they will attempt to prohibit certain prac-
tices which may appear to them as unfair but which may
be in the interest of the public.
The following is the code of ethics adopted by the
Chamber of Commerce of the United States of America
to regulate business conduct :
Business Ethics 563
I. THE FOUNDATION of business is confi-
dence, which springs from integrity, fair dealing,
efficient service, and mutual benefit.
II. THE REWARD of business for service
rendered is a fair profit plus a safe reserve, com-
mensurate with risks involved and foresight exercised.
III. EQUITABLE CONSIDERATION is due
in business alike to capital, management, employes,
and the public.
IV. KNOWLEDGE— thorough and specific—
and unceasing study of the facts and forces affecting
a business enterprise are essential to a lasting indi-
vidual success and to efficient service to the public.
V. PERMANENCY and continuity of service
are basic aims of business, that knowledge gained
may be fully utilized, confidence established and
efficiency increased.
VI. OBLIGATIONS to itself and society
prompt business unceasingly to strive toward con-
tinuity of operation, bettering conditions of employ-
ment, and increasing the efficiency and the
opportunities of individual employes.
VII. CONTRACTS and undertakings, written or
oral, are to be performed in letter and in spirit.
Changed conditions do not justify their cancellation
without mutual consent.
VIII. REPRESENTATION of goods and serv-
ices should be truthfully made and scrupulously
fulfilled.
IX. WASTE in any form, — of capital, labor,
services, materials, or natural resources, — is intol-
erable and constant effort will be made toward its
elimination.
X. EXCESSES of every nature,— inflation of
credit, over-expansion, over-buying, over-stimulation
of sales, — which create artificial conditions and pro-
duce crises and depressions are condemned.
564 Business Ethics
XI. UNFAIR COMPETITION, embracing all
acts characterized by bad faith, deception, fraud, or
oppression, including commercial bribery, is waste-
ful, despicable, and a public wrong. Business will
rely for its success on the excellence of its own
service.
XII. CONTROVERSIES will, where possible,
be adjusted by voluntary agreement or impartial
arbitration.
XIII. CORPORATE FORMS do not absolve
from or alter the moral obligations of individuals.
Responsibilities will be as courageously and con-
scientously discharged by those acting in representa-
tive capacities as when acting for themselves.
XIV. LAWFUL COOPERATION among busi-
ness men and in useful business organizations in
support of these principles of business conduct is
commended.
XV. BUSINESS should render restrictive legis-
lation unnecessary through so conducting itself as
to deserve and inspire public confidence.
Better Business Bureaus. — Some fifty Better Business
Bureaus have been organized in various cities throughout
the country, with a national bureau in New York. They
are organized and financed by the business men to pre-
vent deceptive and fraudulent advertising and to fight
fraudulent business schemes of all kinds. These bureaus
try to work with business men and to correct false ad-
vertising and unethical practices by advice. Thus if a
dealer advertises all-wool suits for $15 when the suits
are not all wool, the bureau tries to induce him to correct
his advertising. If he refuses, the bureau may have a
warrant issued and prosecute him under the laws of the
state.
Business Ethics 565
The bureaus warn the people about fraudulent
schemes and salesmen. Many types of fraudulent
schemes, which take from the people hundreds of millions
of dollars annually, are in use in the country. Among
such schemes may be mentioned fake stock promotions,
fake collection schemes, sales of goods alleged to have
been smuggled into the country, and fake bankruptcy
and fire sales. The bureaus prosecute many of the pro-
motors of such schemes when they operate outside the
law.
Statutes against false advertising. — A great many of
the states have passed laws making false advertising
illegal. The laws are often referred to as "Printers' Ink
statutes" because the magazine Printers' Ink took the
lead in fighting for such laws. Under the "model"
statute which is in force in many states, any advertise-
ment which contains a false statement is illegal, and
the advertiser is liable for fine and imprisonment. This
law places on the advertiser the responsibility of know-
ing that his advertising is truthful and contains no
falsehoods.
The enforcement of this law is presumably the duty
of the prosecuting attorneys in the various counties. As
a matter of fact, these attorneys are often so busy with
other duties that they have little time for watching ad-
vertisements for untruthful statements. For this reason,
the Better Business Bureaus often take the lead in se-
curing evidence and in providing lawyers to prosecute
those advertisers who will not voluntarily reform.
Advertisers in the lead. — Advertisers have taken the
lead in having laws passed making untruthful advertis-
ing illegal, and in establishing and supporting the Better
Business Bureaus. Leading advertisers realize that if
advertising is dishonest people will not believe it, and
566 Business Ethics
it will lose its effectiveness. The truthful advertiser
would suffer with the untruthful. Advertisers realize
that "honesty is the best policy."
Federal Trade Commission. — The demand for better
practices in business had become so strong by 1914 that
Congress passed a law establishing the Federal Trade
Commission. The Commission strives to prevent unfair
practices and to bring about higher ethical standards in
business. Its jurisdiction is limited to cases involving
interstate commerce (the transportation of goods across
state lines). Anyone may call a case of unfairness to
the attention of the Commission. The Commission will
investigate the case, and, if the facts warrant, a complaint
will be issued. The accused then has an opportunity to
present his side of the matter. If after trial the Com-
mission feels that the accused is guilty of unfair compe-
tition, it orders him to cease and desist from such
practices. Appeals from the decisions of the Commission
may be made to the higher Federal courts.
Trade practice conferences. — The Trade Commission
tries to prevent unfair practices by inducing business
men to follow ethical practices voluntarily. The men
in a trade often meet with a representative of the Com-
mission, discuss the practices in their trade, and draw up
codes of ethics or practices which they agree to observe.
This code is submitted to the Commission, which endorses
those parts condemning illegal practices. The Commis-
sion undertakes to enforce these rules against all persons,
regardless of whether or not they were present at the
meeting or agreed to abide by the code. These meetings
are called trade practice conferences or submittals.
Unfair competition. — No exact legal definition has
been given of unfair competition. Congress, in estab-
lishing the Trade Commission, merely stated "that
Business Ethics 567
unfair methods of competition in commerce are hereby
declared unlawful. The commission is hereby empowered
and directed to prevent persons, partnerships, or corpo-
rations from using unfair methods of competition in
commerce."
Unfair competition is dishonest, illegitimate, im-
proper, inequitable, or unjust methods or practices used
in competing for business. The Pan-American Trade-
mark Conference defined it as "every act or deed contrary
to commercial good faith or to the normal and honorable
development of industrial and business activities."
Practices declared unfair. — Many practices have been
declared unfair under the Federal Trade Commission
Act and under the common law. Some of the more im-
portant unfair practices are: deception of customers by
false statements; misbranding of goods; commercial
bribery; resale price maintenance1 ; trade boycotts; price
cutting to drive out competitors; price agreements among
competitors; bribing employees of a competitor; entic-
ing competitor's employees to break their contracts for
purpose of injuring the competitor; misad justing ma-
chines sold by competitors; destroying or removing a
competitor's advertising; exclusive contracts under which
the customer agrees not to handle the goods of other
sellers; disclosing trade secrets acquired by employees;
threats of patent suits made to frighten away customers ;
and use by monopolies of concealed subsidiaries which
are represented as being independent.
Deception of buyers. — Business ethics and law have
progressed to the point where we may say that any
method of deceiving the buyers is unethical or unfair.
The buyers may be deceived by false or misleading
statements in advertisements or sales talks; by secret
1 Several states have recently legalized this practice.
568 Business Ethics
adulteration; by misbranding ; by untruthful labels; by
selling rebuilt machines as new machines; or by simula-
tion of names or slogans. The old motto "let the buyer
beware" has changed to "tell the truth and protect the
buyer."
It is deceptive to advertise part silk hosiery as "silk" ;
to say that part wool blankets are all wool; to sell ma-
hogany veneered furniture as "mahogany"; to sell cigars
made in the United States of domestic tobacco as Ha-
vana cigars; to sell furniture made in Indiana as "Grand
Rapids" furniture; to display coats made of muskrat fur
as genuine sealskin coats; to advertise furs made from
rabbit pelts as beaver; to say that an article is given free
when it is necessary to buy another article to obtain the
article advertised as "free"; to change the labels on goods
and sell them as goods of other producers when done
without the permission of the owner of the original la-
bels; to advertise that the seller manufactures his own
goods when such is not the case; and to sell soap as
"Naphtha" when it contains only a small fraction of one
per cent of naphtha. Many of these things are done, but
they are unethical and most if not all of them are il-
legal.
The Winsted Hosiery Case, decided by the United
States Supreme Court, shows how careful the seller must
be in truthfully describing his goods. The Winsted
Hosiery Company manufactured and sold underwear
that it called "natural meriono," "gray wool," "Australian
wool," or "natural worsted." None of the garments were
all wool and some contained as little 10 per cent wool.
The company defended the practice on the ground that
the terms used were trade terms and did not lead the
dealers to believe that they were buying all-wool gar-
ments. In other words they contended that the terms
Business Ethics 569
had been in use so long that they no longer carried the
normal meaning of the words and that they were under-
stood by men in the trade to denote the kind or quality
of garments which they were used to describe. The Su-
preme Court, however, did not agree with the company's
contention. It held that the labels were false and that
they deceived the buying public. The Court said: "The
fact that misrepresentation and misdescription have be-
come so common in the knit underwear trade that most
dealers no longer accept labels at their face value does not
prevent their use being an unfair method of competition.
A ?nethod inherently unfair does not cease to be unfair
because those competed against have become aware of the
wrongful practice."
To illustrate the simulation of names, suppose that
Johnson has made and sold "Nutak" for years. Now sup-
pose that Edwards enters the market with a similar prod-
uct which he calls "Newtak." If Johnson can show that
Edwards is deceiving the buyers, who think that they are
buying "Nutak," he can be restrained under the law.
Commercial bribery. — Commercial bribery consists in
giving gifts for the purpose of making sales to buyers who
are acting as agents and who accept these gifts without
the knowledge and consent of their employers. Small
and inexpensive things like blotters, calendars, paper-
weights, and cigarettes are considered as advertising me-
diums or as ordinary courtesies and not as gifts.
Commercial bribery is unethical and unfair because the
buyer may be influenced by the gifts and make purchases
that are not in the interest of his employer. He may pur-
chase goods of poorer quality or pay higher prices than
he could obtain from other sellers. He is spending an-
other's money and tries to profit at the expense of his
principal. Commercial bribery increases the cost of sell-
570 Business Ethics
ing and hence the cost of the goods to the consumers.
The seller may use goods or money as bribes. Goods
are more frequently used for the reason that more buyers
will accept goods than will accept money. The buyer
who accepts money knows that he is dishonest, while the
buyer who accepts goods or entertainment may persuade
himself that the articles and entertainment are tokens of
the seller's friendship and esteem. Gifts are often sent
to the wives and children of purchasing agents.
The giving of gifts has been a very common practice.
One company with eleven salesmen spent nearly $6,000
for Christmas presents for buyers.2 In other cases gifts
and entertainment cost as much as five per cent of sales.
The practice is so common that it is hard to stop. The
Federal Trade Commission has taken an active stand
against commercial bribery. The National Association of
Purchasing Agents has gone on record as opposed to it and
objects to purchasing agents accepting gifts from sales-
men. Some cases have been taken to court and declared
illegal. In a recent case, a Federal court enjoined a var-
nish company from giving or offering to give gifts secretly
to customers or prospective customers to influence their
purchases without the knowledge and consent of their
employers. In another case, a state court punished a
clothing buyer for taking bribes from the manufacturers
from whom he purchased clothing.
Bonuses to buyers' salesmen. — Some sellers make a
practice of offering bonuses, prizes, or presents to the
salesmen of their customers to induce the salesmen to
push the sale of their goods. This influences the sales-
men to push the sale of these products whether or not
they are in the interest of the consumers or of their em-
ployers. Salesmen are working for their employers and
2 Printer's Ink, Sept. 5, 1925.
Business Ethics 571
not for the sellers from whom their employers purchase
the goods. Merchants who allow their salesmen to ac-
cept bonuses from the makers of the goods thereby lose
part of their control over their men; for this reason, the
value of the practice is very doubtful. The practice is
unfair if done without the knowledge and consent of the
employers of the salesmen. The practice has been de-
nounced by the Federal Trade Commission and by sev-
eral trade organizations.
Prices. — Several practices relating to prices are unfair.
Price agreements among competitors are, of course, un-
fair and illegal, regardless of the form they take.
Competition on prices is at the very center of the com-
petitive system. Nevertheless, price cutting may be un-
fair under certain conditions. If one company sells below
its cost of production for the purpose of putting a com-
petitor out of business, the practice is held to lessen
competition and hence to be unfair. For price cutting
to be unfair, the seller must sell below his cost. Suppose
that the Jones Company has a production cost of $1 per
unit, and that the Smith Company has a cost of $1.25.
If the Jones Company places its price at $1.10, it is not
selling below cost but is nevertheless making it very hard
for the Smith Company to compete. The Smith Com-
pany must sell at a loss, quit business, or reduce its costs.
It is in a very unpleasant position. Nevertheless, under
the competitive system, Jones may undersell Smith to
get the business, and Smith is supposed to drop out if he
is unable to reduce his costs.
Let us consider a different situation. Suppose that
Brown & Company has a cost of $1.10 and that it is very
much larger than the Jones Company, whom it wishes
to put out of business. Brown & Company therefore
places its price at 90^ . It knows that it will take a loss.
572 Business Ethics
but it has more capital than the Jones Company and can
afford to take a loss until the Jones Company is ruined
and driven out of business. This is clearly unfair, un-
ethical, and an illegal procedure. Competition on prices
is perfectly fair, but when one seller sells below his own
production cost with the object of driving competitors
out of business, it is unfair.
Boycotts. — A boycott is a combination of people with
the purpose of refusing to deal with a given person.
Groups of wholesalers have been known to agree to refuse
to buy from a manufacturer who sold to the retailers.
Boycotts are unethical and illegal.
Exclusive contracts. — Sellers frequently offer the deal-
ers exclusive agencies, the free lease of equipment, or
special prices, rebates, or refunds if the dealers will agree
not to handle the products of competing sellers. Such
a practice is very likely to prevent competing sellers from
securing outlets for their good§ and so result in lessening
competition. In such a case the practice is unfair.
Unfair competition under the NRA. — In 1933 Con-
gress passed the National Industrial Recovery Act which
was in force until it was declared unconstitutional by the
Supreme Court in 1935. Under this Act some 700 trade
groups or associations formulated codes of fair compe-
tition which were approved by the National Recovery
Administration. These codes denounced many unfair
practices, such as inaccurate advertising, misrepresenta-
tion of goods, the giving of free goods and secret allow-
ances, disparagement of competitors7 goods, full-line
forcing, procuring trade secrets, promoting breach of con-
tracts, unauthorized use of trademarks, unauthorized sub-
stitution of goods, and unreasonable cancellation of
contracts. Most of these practices were already held to
be unfair under the Federal Trade Commission Act.
Business Ethics 573
The main provisions of these codes, however, had to
do with establishing minimum wages and maximum hours
for employees and with trying to limit competition and
control prices by employers. In order to control prices,
several codes attempted to control or limit production.
Code provisions limiting competition and controlling sup-
ply and prices were unfair under the theory and law of
competition as generally understood in the United States.
Conclusions. — Free competition has been limited by
large or monopolistic companies and by agreements and
understandings existing between competitors. Many
European countries have allowed competition to be lim-
ited by agreements by "cartels" (a form of trade associa-
tion). Many have advocated that the United States
forsake its theory of free competition and adopt that of
controlled, or regulated, monopoly. But there are many
advantages to a system of open and free markets. Be-
fore we adopt a system of regulated monopoly, the author
would like to see a sincere and aggressive attempt made
to break up monopolies and enforce free competition.
He feels that such an effort on the part of the national
and state governments, backed up by a strong public
opinion, will be successful, and that it will secure many
advantages that cannot be secured under a system of in-
dustry controlled by either trade groups or government.
Chapter 35
Review Questions
1. What is meant by business ethics?
2. Is business conducted along more or less ethical lines
than 25 years ago? What evidence can you cite to prove your
answer?
3. Why does business need rules and umpires?
574 Business Ethics
4. Name as many agencies as you can that are working
for higher ethical standards in business.
5. What is meant by codes of ethics? Is there any danger
in such codes?
6. What is meant by saying that ethical codes provide
for higher standards of conduct than legal codes?
7. What are Better Business Bureaus? What do they do?
8. Who have taken the lead in organizing and supporting
these bureaus?
9. What are the "model," or "Printers' Ink," statutes?
10. What is the Federal Trade Commission? How does it
operate?
11. What are trade practice conferences?
12. What is unfair competition? Are methods of unfair
competition illegal?
13. Name some practices that are held to constitute un-
fair competition.
14. What is meant by deceiving the buyers? Are all
methods of deceiving unethical?
15. What was the defense and the decision in the Winsted
Hosiery Case?
16. What is meant by simulation of names?
17. What is commercial bribery? Why is it unfair?
18. Is it fair for a manufacturer to offer bonuses to the
merchant's salesmen for the sale of the former's products?
19. When is price cutting unfair?
20. What is a boycott?
21. What is meant by exclusive contracts? Why are they
unfair?
22. What were the chief provisions of the NRA codes?
Thought Problems
1. The old rule was that the buyer should beware. The
new rule is that the buyer is not to be fooled nor deceived.
Business Ethics 575
How far should the courts go in protecting the buyers from
their own ignorance and carelessness?
2. What is meant by the statement "business is business"?
3. What is meant by saying that "honesty is the best
policy"?
4. Is it true that honest business men are often forced to
use dishonest practices because of unfair competitors?
5. The Haywire Company manufactures furniture out
of chestnut and gum wood which it covers with a thin coating
of mahogany veneer. It advertises its product as mahogany.
Is this fair?
6. The Evcless Company manufactures furniture of soft
wood and then stains the surface to resemble walnut. It
marks its furniture American Walnut, Black Walnut, Red
Walnut, and so forth. Is this unfair?
7. The Coonskin Company advertises coats made of
muskrat skins as Canadian Seal, Siberian Seal, and Hudson
Bay Seal. Is this fair?
8. A company located in New York State makes cigars
from domestic tobacco which it sells as Havana cigars. It
claims that Havana is a trade name used to denote its type
of cigars. How about it?
9. The NoKnock Knitting Mills Company shows a picture
of a large factory on its stationery and on much of its adver-
tising matter. It does not own or operate any mills. It is
purely a selling company. Is it guilty of unethical or unfair
competition?
Index
AAA, benefits of, 272, 274
Abbot, Mcrkt & Co., 167, 168
Abraham & Straus, Inc., 549
Acquisitiveness, 451
Action, securing:
in display, 413
in sale, 448, 462
Advertised goods:
as price leaders, 120
demand for, 122
price of, 121
Advertising (Chs. 32, 33, 34) .
and business cycles, 521
and selling, 546
appeals, 535
by agencies, 522
by chain stores, 195, 196
by cooperative chains, 203-204,
'210, 213
by department stores, 170
by mail-order houses, 174-175,
177, 178, 180
by rural stores, 149
by small stores, 156
by trading center stores, 151-152
copy, 548, 557
cost, 514, 516, 519, 522
direct-mail, 174-175, 177, 178,
180, 529-530
headlines, 546, 547
kinds of, 526
mediums (Ch. 33), 527
novelties, 531-532
of services, 242-243
outdoor, 530, 531
photographs in, 546
planning of, 523-524
Advertising (continued) :
policy, 516
position in layout of, 543, 544
radio, 531
Advice :
by brokers, 79
giving, as part of selling func-
tion, 19
Affection as a buying motive, 451,
459
Agent (.sec also Brokers), 72
Agricultural Adjustment Act, 271
Agriculture (sec tarm)
American Institute of Food Dis-
tribution, Inc., 211
Amusement, desire for, 451
Apartment hotels, selling
space in, 250
Apartment houses, selling
space in, 251
Appeals, in advertising, 535
Applications for positions as sales-
men, 497
Approach, the, in selling, 454, 455
by retail salesmen, 471
Arrangement of stores, (Ch. 24),
363, 401
Assembling, 46
of farm products by retailers,
146
Attempts by cooperative associa-
tions to reduce marketing
costs, 264
Attention, 448, 456
attracting, by display, 413
Auctions, (Ch. 6), 86, 91
charges, 90
psychology of, 87
578
Index
Automobiles :
as affecting trade of retail stores,
147-150, 157, 180
number, 29
B
Bad debts, 366, 368
Bankruptcy, causes of, 442
Base-surplus plan (for milk), 307
Benjamin Franklin Hotel, adver-
tisement of, 555
Better Business Bureaus, 564, 565
Bills of lading, 24, 25
Bonds, selling of, 248, 249
Bonuses :
for salesmen, 507
to buyers' salesmen, 570
Boycotts, 572
Brands, private, 119, 123
Bread, cost of producing and dis-
tributing, 7
Brokers, (Ch. 5), 58, 60, 90, 224,
258, 284, 311, 324
advantages of, 78-81
advice by, 79
coal, 230
earnings of, 78
Budget, 426
Bulk goods, 67
Business :
and distribution, 2
conditions, 425
cycles, 425, 426
and advertising, 521
ethics (Ch. 35), 560
mortality, 437-444
object of, not profit, 435
Business Week, The, 397
Butter, marketing of, 309, 311
Buyers :
finding, 19
types of, 464, 465
Buying, (Ch. 25), lft-17, 420
and quality, 427
brokers, 73
by wholesaler, 111
club, 206, 207
function analyzed, 16, 17
groups, 214, 217
Buying (continued) :
motives, 450, 451, 535, 536
small-order, 376, 378
reciprocity in, 430
California Fruit Growers' Ex-
change, 6
Capital, uses of, 366
Caples, John R., 546
Capper, Arthur, Senator, 95
Car cards, 533
Cash-carry :
retailers, 148, 191, 192, 203
wholesalers, 114, 193
Cash discount, 334
Chain competition, meeting by in-
dependent merchants, (Ch.
12), 202
Chain stores, (Ch. 11), 183
Chase and Schlink, Your Money's
Worth, 45
Chicago Board of Trade, 93, 95
Chicago Mercantile Exchange,
93
Classification :
of commodities, 65
plan, in buying milk, 305, 307
Closing the sale, 476
Clothing stores:
failures, 437
volume of sales per full-time
salesman, 359
Coal, marketing of, 225, 230
Codes of ethics, 562
Coffee, sugar, and cocoa ex-
changes, 93
Collections, 366, 368
percentages, 367
period, 357, 362, 366
Color, in advertising, 413
Commercial bribery, 569, 570
Commission :
merchants, 73, 74, 82, 83, 258,
283, 293-294, 320-321
method of paying salesmen, 505
rates of, for brokers and com-
mission merchants, 76
Index
579
Commodities (see also Goods),
175
classification of, 65
Commodity approach, 4, 48, 64
advantages of, 5
Commodity Exchange, Inc., 93
Commodity exchanges, 92, 100
Concentration, 51, 52
and dispersion, of farm products,
255
of livestock, 289
of milk, 302
yards for livestock, 291, 292
Conferences, trade practice, 566
Confidence, in salesmen, 487, 488
Consumers' goods, 66, 222
Consumption :
goods from farms, 256
of cotton, 315
of meat, 289
Convenience goods, 66, 149, 150
Cooperative :
associations :
attempts by, to reduce mar-
keting costs, 264
selling cotton, 321, 324
selling giiun, 287, 288
selling milk, 303
shipping livestock, 290
chains, 210, 217
securing lower prices, 327
delivery systems, 217
marketing of farm products,
263, 266
Contracts, exclusive, 572
Control of supply of farm prod-
ucts, 260, 274
Copy advertising, 548
Corn, marketing of, 286, 287
Cornflakes, cost of producing and
distributing, 6, 7
Corn-hog ratio, 295, 297
Cost :
incurred by risk, 50
of advertising, 514, 516, 519, 522
of distribution should be re-
duced, 13
of marketing:
butter, 311
Cost (continued) :
cotton, 322
livestock, 295
milk, 309
total, 9
wheat, 285, 286
of private and national brands,
121
of storage, 35
of transportation, 23
price, 333, 334
replacement, 338
Cotton:
buying of, by the mills, 323-324
gin, 319
marketing, 315, 322
merchants, 321
mills, 315
Country buyers, 290, 320
Country elevators, 281-284
Country shippers, 57
Cream, marketing of, 302
Creamery butter, 310
Credit:
bureaus, retailer-owned, 217
by department stores, 166, 168
by rural stores, 148
by small stores, 156, 204
by wholesalers, 114
policy, 368
Curiosity, 451
Custodian warehousing, 40
Customary prices, 328
Customer frontage, 365, 411, 412
Customers, drawing, deep into the
store, 403
Cut-price leaders:
advertised goods used as, 120
used by chain stores, 196
used by cooperative chains, 203
used by department stores, 171
Cycles :
business, 425, 426
of production of farm products,
262
D
Dairy products, marketing, (Ch.
17), 301
580
Index
Davidson System, 113
Debenture plan, 270, 271
Deception of buyers, 567, 568
Delivery by wholesalers, 114
Delivery vehicles and advertis-
ing, 532
Demand :
changes in, 420, 426
creation of, 18
estimating, 420, 426
for clothing, 316
for farm products, 259, 265
Demurrage, 25
Department stores, 163, 174
failures, 437
margins, 346
operating expenses and profit,
346
rent, 365
stock turnover, expenses, and
profit, 375
Departure, by salesmen, 463, 464
Desire, 448, 459, 460
creation of, 474
Diebold Safe & Lock Co., adver-
tisement of, 554
Direct-mail advertising, 174-175,
177, 178, 180, 529-530
Direct marketing of livestock, 292
Discounts, trade, 334 (footnote)
Dispersion, 51, 52 (see also Con-
centration)
of milk, 303
Display :
attracting attention by, 413
cabinets, 410
of goods, in retail stores, 363
of stock, (Ch. 24), 401
table, 408
Distances traveled by farmers to
purchase different types of
goods, 150
Distribution (Ch. 1):
a part of business, 2
a part of economics, 2
Census, 165
cost of, 6
costs, why so high? 9, 12
functions, 2, 15
Distribution (continued) :
interest in, 1
meaning of, 1
method and advertising, 516, 517
methods of studying, 4
object of, 3, 4
Dividing, 46, 47, 58, 128
by wholesaler, 111
Dollar control, 397, 398
Domestic allotment plan, 271
Down-town retail stores, 152
Drop shipper, 115, 116
Drug store: '
cooperative chains, 213
failures, 437, 439, 442
wholesale sales per salesmen,
359
Dry goods stores, failure of, 437
E
Economic definition of profit, 433
Efficiency :
method of measuring, 350, 353
operating, 349
tests for merchandising, 357
Eggs, trade channel for, 61
Electricity, selling, 246, 247
Elevators:
country, 281-284
terminal, 284-285
Ely & Walker Dry Goods Co., 389
Entertainment, selling of, 242-244.
Enthusiasm of salesmen, 459, 488
Equipment :
obsolescence of, 222
sale of, 225
Ethics, business, (Ch. 35), 560
Even prices, 328, 329
Examinations for merchants, 444
Exchanges (see also Commodity
exchanges), 86
Expenses, (Ch. 20), 322, 344
and profits of department stores,
169, 170
and services, relation between,
348
and stock turnover, relation be-
tween, 374-375
classification of, 344, 345
Index
581
Expenses (continued) :
of chain stores, 18&-189, 192-193
of department stores, 173, 346
of hardware stores, 351
of retailers, 133, 135, 137
of wholesale merchants by size,
118
of wholesalers, 115, 117
of wholesalers and retailers com-
bined, 189
variation in, 347, 349
Fabricated parts, 233-234
Facial expression of salesmen, 485
Factors, 320, 321
Failure, 436, 444
causes of, 439, 443
Farm:
income, 267
income for 1929 and 1933, 254-
255
products, 66, 256
as consumption goods, 256
as raw materials, 256
assembling of, by retailers, 146
control of supply of, 260
cycles of production of, 262
rail shipment of, 257-258
marketing, (Chs. 15-18)
relief, 267-275
Farm Board, 269
Farmers' market, 257
Farmers National Grain Corpora-
tion, 288
Farming :
one-crop versus mixed farming,
254
types of, 253
Fashions, 422-424
Fear:
as a buying motive, 451
in advertising, 536
Federal Trade Commission, 121,
188, 190, 211, 566, 570
Federal Trade Commission Act,
572
Feeding the market, 265
Field warehousing, 40
Financial :
risks, 48
strength and advertising, 518
Financing, 47
of cotton growers, 317
Flat price plan, in buying milk,
305
Freezing, quick, 36
Freight containers, 26, 27
Freight rates, carloads, 38
Frontage, customer, 365
Fruit auctions, 88, 90
Full stocks, advantages of, 381-
382
Functional approach, 4
advantages of, 5
middlemen, 57, 58, 59
Functions:
of brokers, 76, 80
of retailers, 127, 128
of wholesalers, 110, 114
Furniture stores, failure of, 437
causes of, 441
Future trading, 94-96
G
Garages, failure of, 437
Gas, selling, 247
General stores, 146
failure of, 437
Gin, cotton, 319
Good Hardware, 410, 414
Goods (see also Commodities),
66
marketing industrial, (Ch. 13),
220
misbranding of, 567
selection of, by buying groups,
214, 215
sold by chain stores, sources of,
188
sold by mail, 175
Government-licensed warehouses,
42-43
Grading, 46
Grain, marketing of, 279, 288
Grocers, retail, and sales per per-
son, 358
582
Index
Grocery stores:
failure of, 439
layout, 407, 411
Group buying, 214, 217
H
Hardware stores:
failures, 437, 439
operating expenses and profits,
351
sales per person, 358
Harvard Bureau of Business Re-
search, 169, 189, 364
Headline in advertising, 546, 547
Health of salesmen, 486, 487
Hedging, 98-100
Hobby approach, 455
Hoffman-Neill rule, 402
Honesty by salesmen, 487
Hotel service, selling, 249-250
Illustrations in advertising, 546
Importer, 60, 61
Income (see also Profit), 433
farm, 254, 255, 267
of industrial workers, 267
Independent retail stores, (Ch. 9),
143, 206
Industrial goods, 66
marketing of, (Ch. 13), 220
Initiative of salesmen, 489
Institutional advertising, 526
Institutional approach, 4
Institutions, 56, 59
Insurance, life, selling, 248-249
Integrated and non-integrated
stores, 133
Integration, 62, 64
of chain stores, 183, 184
Interest, 448, 458, 459
as an expense, 344
Interviews :
by salesmen, 472, 474
securing, 453, 454
to select salesmen, 498
In-transit privileges, 25
Inventory, annual, 390, 393
Jobbers (see <7/,sr> Wholesalers), 57
steel, 233
K
Kansas City Board of Trade, 93
Knowledge needed by salesmen,
482
L
Leaders, 171, 196
price, 329, 330
Lepis, Louis A., Inc., advertise-
ment of, 556
Liability :
for injury, 48
of loss of key man, 49
on common carriers, 24
on contracts, 48
Lighting stores and windows, 415,
417
List price, 334
Livestock :
buyers, 290
marketing of, 288-297
Location :
and expenses of retailers, 136
and expenses of wholesalers, 119
and rent, 401, 402
of chain stores, 196
of department stores, 171
of stores, 364
Lodgings, selling, 249-251
Low prices, 327, 328
Luther, A. J., & Co., 408
M
Macy, R. H., & Co., 545
Magazine advertising, 528
Mail-order house, 174-180
Mail-order wholesaler, 116
Management of marketing enter-
prises, 51
Mandel Bros., 164
Manufacturers' agents, 74
Margin, 335, 336-337
and stock turnover, 375
affected by rate of stock turn-
over, 383
Index
583
Margin (continued) :
average, 339
of department stores, 169, 170,
346
variation in, 339
Marginal dealing, 96
Mark-downs, 335, 336
and stock turnover, 374
effect of, 337
Marketing:
costs :
attempts by cooperative as-
sociations to reduce, 264
have they increased? 11
why so high? 9, 12
enterprises, management of, 51
functions, (Ch. 2), 2, 15
interest in, 1
methods, 256, 257
Mark-up, 332, 333
percentage, 335, 336
Mass display, 413
McGraw-Hill Book Co., Inc , 484
Meat, consumption of, 288, 289
Meat stores, failures, 437
Mediums, advertising, 527
Merchandise brokers, 74, 81
Merchants, 57
cotton, 321
independent, meeting of chain
competition by, (Ch 12), 202
Middlemen, 56, 59
approach, 4
advantages of, 5, 6
handling industrial goods, types
of goods and sales of, 226, 227
kinds of, 56
types of, handling equipment,
224, 225
Milk, marketing of, 301-309
Minneapolis Chamber of Com-
merce, 93
Minor point, closing sale on, 462-
463
Misbranding of goods, 567
Model stock, 388, 390
Montgomery Ward & Co., 174
Mortality (see also Failure), 437
Motor trucks (see also Trucks), 27
Mutual wholesalers, 116, 210
N
National brands, cost of, 121
National Retail Hardware Asso-
ciation, 206, 351, 402, 404, 436
Natural classification of expenses,
345
Negotiating terms, 19
Neighborhood and suburban retail
stores, 156, 157
New Orleans Cotton Exchange, 93
Newspapers, as advertising me-
dium, 527
New York City, 379, 484
New York Cotton Exchange, 93
New York Mercantile Exchange,
93
New York Times, The, 545, 549
Novelties in advertising, 531-532
NRA:
code, wages for truck drivers
under, 28
unfair competition under, 572
Nystrom, Paul, 395, 438, 440
0'
Oakland Tribune, advertisement
of, 551
Objections, how to meet, 460
Obsolescence of equipment, 222
Odd prices, 328
One-price policy, 330-331
Operating :
expenses, 344
classification of, 345
results of retail hardware stores,
351
statement, 345, 347
supplies, 225
Oranges, cost of producing and
distributing, 6
Order bill of lading, 25
Order buyers, 294
Ordering and buying, 422
Orderly marketing, 265
for cotton, 323
Order-taking versus salesmanship,
448
584
Index
Organization of:
chain stores, 186-188
department stores, 166
sales department, 507-508
Outdoor advertising, 530, 531
Ownership risks, 48
Packages, as advertising medium,
532
Packing, 43
Pan-American Trademark Confer-
ence, 567
Patronage dividends, 263
Pay and salesmanship, 362
Paying salesmen, 503-507
Pennsylvania Railroad, 26, 108
Perpetual inventory, 393-397
Perseverance by salesmen, 487
Personality of salesmen, 485
Photographs, in advertising, 546
Planning, in advertising, 523-524
Pooling, 265
cotton, 323
Position, in layout of advertise-
ments, 543, 544
Preapproach, 451-453, 470
Price, 327-332
advertising, 526
agreements among competitors,
567
and unfair competition, 571
flat, plan for milk, 305
future, 428
lower, and stock turnover, 382
obtained by:
buying groups, 215-217
cooperative chains, 212
of cash-carry wholesalers, 327
of corn, 287
of farm products, 259-266
forecasting, 261-263
of private brands, 120, 121
of wheat, 285
paid by chains, 190
prevailing, 428
selling by chains, 190
stabilizing, 265
Pride, as a buying motive, 451, 459
Printers' Ink, 565, 570
Printers' Ink Statutes, 565
Private brands, 119, 123
cost of, 121
Processing tax, 272
Product advertising, 517, 526
Production cycles of farm prod-
ucts, 262
Professional services, selling, 244
Profit, (Ch. 26), 433
affected by rate of stock turn-
over, 383
and stock turnover, 375
average, 435, 436
economic definition of, 433
motive, 451
of brokers, 78
of department stores, 169, 170,
346
of hardware stores, 351
of rural dealers, 435-436
proper basis of, 434
variation in, 434, 435
Progressive Grocer, The, 154, 155,
349 (footnote), 405, 407, 411
Psychology of auctions, 87
Publicity, 533
Public opinion and chain stores,
197-198
Public sales (see also Auctions), 86
Public warehouses, 39
charges of, 42
liability of, 41
Purchasing agent, work of, 429-
430
Quality :
and buying, 427
and private brands, 120
Quick freezing, 36
R
Radio advertising, 531
Rail shipment of farm products,
257-258
Rates of stock turnover, 383
Raw materials, 231
from farms, 256
Index
585
Reciprocity in buying, 430
Reconsignment, 25
Red Barrel, The, 139
References for salesmen, 499
Rent:
divided according to parts of
store, 401, 402
of stores, 363
per square foot, 365
Replacement costs, 338
Resale price maintenance, 567
Research Bureau of Retail Train-
ing, University of Pittsburgh,
484
Research by retailers, 205
Resident buyers, 73
Restaurants, failures, 437
Retail :
sales according to location of
stores, 145
salesmanship, 469
salesmen, 449
selling, problems in, 469
stores :
display of goods in, 363
neighborhood and suburban,
156, 157
rural, 145, 151
Retailer-owned wholesale houses,
207-210
Retailers, 58
assembling of farm products by,
146
types of, 130
Retailing, (Chs. 8-12), 127
Retail Research Association, 206
Risk, 128
and storage, 35
guarding against, 50
increases marketing costs, 50
shifting, 49
why assumed, 49
Risking, 47, 50
Ronald Press Co., 484
Rothschild, Maurice L., advertise-
ment of, 553
Rules in business, need for, 561
Rural dealers, profits of, 435-436
Rural retail stores, 145, 151
Salary and commission method of
paying salesmen, 506-507
Salary method of paying salesmen,
503-505
Sales (.sre also Volume) :
agents, 72, 73
selling coal, 230
and advertising, 519
department :
duties of, 496
organization of, 407, 508
increasing, 382
irregular, 360, 361
of retail stores by location, 145
per person, 357, 362
per salesman, 358, 359
per square foot of space, 357,
362, 364
retail :
per person, 360
volume of, 128
size of, 362-363
talk, construction of, 465-466
talks, value of, 466-467
training, 362
Sales management, (Ch. 31), 496
Salesmanship, (Chs. 27-29), 362
necessity for, 449
principles of, 447
rating of, 475
retail, (Ch. 29), 469
versus order-taking, 448
Salesmen :
applications for positions as,
497
hiring of, 496
methods of paying, 503-507
securing information, 483'
specialty, 112-113
stimulating, 502-503
supervising, 501
training, 499-501
types of, 449
needed for industrial goods,
235
volume of sales, 358, 359
586
Index
Sales talk, (Ch. 28), 458
Sample, sale by, 94
Sample Census, 165
Sears, Roebuck & Co., 174
Securing information, by salesmen,
483
Selecting salesmen, 497-498
Self-service stores, 158-159
Selling (see also under separate
articles and services) :
by telephone, 477
function, 17, 19
service, (Ch. 14), 239
success in, 481
suggestive, 476
Selling agents, (Ch. 5), 72
Semi-jobber, 116
Service (see also Functions) :
and expense, 348
as an element in cost, 10
functions involved in distribu-
tion, 15
of chains, 194
of department stores, 168, 169,
173
of passenger automobiles, 29
performed by :
motor trucks, 27
railroads, 23
Shape of advertisements, 542-543
Shirts, model stock of, 389
Shoes, cost of producing and dis-
tributing, 8
Shoe stores, failure of, 439
Shopping goods, 67, 145, 150
Short selling, 96-97
Sincerity of salesmen, 489
Size:
and expense of retailers, 137,
138
and expense of wholesalers, 117
of advertising, 541
of sales, 362, 363
use of, in display, 413
Size-up, by salesmen, 471
Small-order buying, 376
Small retail stores, 138-140
problems of, 143, 144
Specialization, by retail stores,
153-154
Specialty salesmen, 112, 113, 449
Speculation, 96-98
Spot sales, 94
Stage of distribution, 62
Standardizing, 43
Standards :
uniform, 44
wastes caused by lack of, 44-46
Steel:
jobbers, 233
marketing of, 231-233
Steward, A. T., 331
Stimulating salesmen, 502-503
Stock :
arrangement, (Ch. 24), 401
fewer items in, 378, 381
Stookkeeping, (Ch 23), 388
systems, 390, 398
Stock turnover, (Ch. 22),
and profit, 375
by chain stores, 194, 195
how computed, 373
rates of, 383
Stockyard, picture of, 293
Storage, (Ch. 3), 33-43
cost of, 35
facilities, 39
influence of, on prices, 33, 43
kinds of, 35-36
whore goods should be stored,
36-38
who should store, 38-39
Stores:
arrangement of, (Ch. 24), 363,
401
lighting of, 415
Storing, by wholesalers, 110, 111
Straight bill of lading, 25
Subsidy on farm products, 269-270
Substitution, by salesmen, 474
Success in selling, (Ch. 30), 481
Suggestive selling, 476
Supervision:
of chain stores, 188
of cooperative groups of re-
tailers, 205
Supplies, sale of, 225
Index
587
Supply :
finding sources of, 17
of farm products, 259
Swenscn, Dorothy E., 549
System, 438
Tables, display, 408, 409
Tact, needed by salesmen, 490
Tariffs on farm products, 268
Telephone, selling by, 477
Telephone and telegraph service,
selling, 248
Terminal elevators, 284-285
Terms of sale, negotiation of,
17-19
Territories :
and advertising, 518
for salesmen, 508
Testimonials, 459
Tests, trade and intelligence, 499
Thrift, selling, 248, 249
Tickler system, 391-393
Title, obtaining, 17
Town, size of, and retail ex-
penses, 136
Trade channels, 59-64
for butter, 311
place of broker in, 77
place of wholesaler in, 103
Trade discounts, 334 (footnote)
Trade paper advertising, 528, 529
Trade practice conferences, 566
Traffic, volume moved by various
carriers, 23
Training salesmen, 499-501
Transportation, 19-29
and storage, competition in, 36
as an clement in marketing
cost, 10
by trucks, 27-29
cost of, 23
methods of, 20
our system, 21
selling, 245-246
Trucks :
hauling milk, 302
in shipping of:
farm products, 257-258
Trucks (continued} :
livestock, 291
transportation by, 27-29
Truck wholesalers, 115
Turnover increases profit, 384
Types of middlemen, 56
U
Unfair competition, 566
Uniform standards, 44
Unit control^ 383-397
U. S. Chamber of Commerce, 402,
404, 407, 408, 411, 425, 562
U. S. Department of Agriculture,
90, 257, 281, 290, 310, 319
U. S. Department of Commerce,
215
Utility:
defined, 2-3
form, 2
place, 2, 19
possession, 2
time, 2, 33
Vending machines, 258
Vendor-tie-ups, 210
Village store, advertising methods,
534
Volume (see also Sales) :
of brokerage business, 75
of business of chains, 185
of business of selected service
industries, 241
of business of various types of
middlemen handling indus-
trial goods, 226, 227
of chain store business, 1933,
187
of mail-order business, 176
of retail business, 128-130
of sales of department stores,
165, 166
of sales of retail stores located
in towns of different sizes, 153
of sales of retail stores of va-
rious types, 131
of sales of retail stores operated
in different ways, 332
588
Index
Volume (continued) :
of wholesale trade, 105, 106
Voluntary chains (see Coopera-
tive: chains)
W
Wagon goods, 67
Wagon-wholesalers, 115
Waldorf-Astoria, advertisement of,
552
Wallace, IT. A., 287
Wall fixtures, 409
Wanamaker, John, 331, 560
Wants, expansion of, 3-4
Warehouses :
government-licensed, 42-43
newer type of layout for whole-
saler, 113
Water carriers, 22
Weather :
and demand, 424
cycles, 242
risks, 49
Wheat, marketing of, 279-289
Wholesale :
expenses, 105
functions, 110
merchants, 107
salesmen, 449
Wholesaler-retailer cooperative
chains, 210-211
Wholesalers, (Ch. 7), 57, 103
coal, 230
delivery by, 114
mutual, 210
retailer-owned, 207-210
steel, 233
Window :
display, 412
lighting, 415-416
Windows, types of, 412-413
Yard traders, 294, 295
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